TEST BANK for Financial Accounting 7th Canadian Editon by Robert Libby, Patricia Libby, Daniel G. Sh by ACADEMIAMILL

Chapter 01 - Financial Statements and Business Decisions

Chapter 01 Financial Statements and Business Decisions

True / False Questions 1. Accounting is a system that collects and processes financial information about an organization and reports that information to decision makers. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-01 The Four Basic Financial Statements: An Overview

2. External users of accounting information include the managers who plan, organize, and run a business. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-01 The Four Basic Financial Statements: An Overview

3. In accounting and reporting for a business entity, the accounting and reporting for the business must be kept separate from other economic affairs of its owners. TRUE

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Chapter 01 - Financial Statements and Business Decisions

4. Accounting communicates financial information about a business to both internal and external users. TRUE

5. A statement of financial position should be dated for a period (such as "For the year ended December 31, 20X1"), whereas a statement of earnings should be dated at a point in time (such as "At December 31, 20X1"). FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-01 The Four Basic Financial Statements: An Overview

6. Expenses are the cost of assets consumed or services used in the process of generating revenue. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-06 The Statement of Earnings

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Chapter 01 - Financial Statements and Business Decisions

7. Generally speaking, a financially success business will have positive cash flows from operating activities. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-12 The Statement of Cash Flows

8. The issuance of additional common shares is a financing activity that generates positive cash flow to the firm. TRUE

9. Borrowing money and issuing shares are examples of financing activities TRUE

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Chapter 01 - Financial Statements and Business Decisions

10. Total assets are $60,000, total liabilities, $30,000, and share capital is $20,000; therefore, retained earnings is $5,000. FALSE Calculation: $60,000 - $30,000 - $20,000 = $10,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-02 The Statement of Financial Position

11. Investing activities involve collecting the necessary funds to operate the business. FALSE

12. The purchase of equipment is an example of a financing activity. FALSE

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Chapter 01 - Financial Statements and Business Decisions

13. The reasons for a decrease in cash can be determined by examining the statement of earnings. FALSE

14. Economic resources that are owned by a business are called shareholders' equity. FALSE

15. The accounting model for the statement of financial position is: Assets + Liabilities Shareholders' Equity. FALSE

16. Assets are resources owned by a business that provide current services or benefits to the business. FALSE

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Chapter 01 - Financial Statements and Business Decisions

17. Profit is the excess of total revenues over total expenses incurred to generate revenue during a specific period. TRUE

18. The financial statements prepared by a corporation include a statement of financial position, statement of earnings, statement of cash flows, and statement of money. FALSE

19. A banker who is considering making a loan to a corporation would be one of the corporation's internal decision makers. FALSE

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Chapter 01 - Financial Statements and Business Decisions

20. Assets are economic resources controlled by the entity as a result of past transactions or events and from which future economic benefits can be obtained. TRUE

21. The financial statement that shows an entity's economic resources and its liabilities is the statement of retained earnings. FALSE

22. The statement of comprehensive income reports the change in shareholders' equity during a period from business activities other than investments by shareholders or distributions to shareholders. TRUE

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Chapter 01 - Financial Statements and Business Decisions

23. A note payable is a borrowing instrument that generally does not involve the payment of interest. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-02 The Statement of Financial Position

24. If a corporation does not pay its obligations when they are due, its creditors may be able to force the sale of the business's assets to pay their claims. TRUE

25. The fiscal year end of a given business must be December 31, the calendar year end. FALSE

26. A net loss in a given accounting period will shrink the retained earnings account. TRUE

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Chapter 01 - Financial Statements and Business Decisions

27. A plane ticket sold by Air Canada in the fall for going home during Christmas immediately gets recorded as revenue. FALSE

28. When a company ships products to a customer and bills the customer, the company should recognize revenue as earned. TRUE

29. The amount of cash paid by a business for office rent would be reported on the statement of cash flows as a financing activity. FALSE

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Chapter 01 - Financial Statements and Business Decisions

30. Repayment of a bank loan is classified on the statement of cash flows as an operating activity. FALSE

31. Liabilities are the entity's legal obligations that result from past business events. TRUE

32. International Financial Accounting Standards are produced by the International Accounting Standards Board (IASB), which is an independent standard-setting board consisting of 15 members from twelve countries. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-19 International Financial Reporting Standards (IFRS)

33. Financial accounting is based on man-made rules that sometimes undergo change. TRUE

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Chapter 01 - Financial Statements and Business Decisions

34. Auditors are responsible for expressing an opinion of the consolidated financial statements based on their audits. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-18 Responsibilities for the Accounting Communication Process

35. Primary responsibility for the information in the financial statements lies with auditors. FALSE

36. The AcSB is currently the body responsible for establishing accounting standards. TRUE

37. The Accounting Standards Board (AcSB) is an agency of the federal government that establishes generally accepted accounting principles for businesses. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-18 Responsibilities for the Accounting Communication Process

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Chapter 01 - Financial Statements and Business Decisions

38. Generally accepted accounting principles are essentially identical in most developed countries. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-19 International Financial Reporting Standards (IFRS)

39. One of the disadvantages of a corporation when compared to a partnership is the limited liability of the owners. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-S1 Describe the different types of business entities. Topic: 01-27 Appendix 1A: Types of Business Entities

40. Corporations have the advantage of having limited liability. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-S1 Describe the different types of business entities. Topic: 01-27 Appendix 1A: Types of Business Entities

41. In a partnership, the creditor can come after the personal assets of either partner should the business default on its debt. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 01-S1 Describe the different types of business entities. Topic: 01-27 Appendix 1A: Types of Business Entities

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Chapter 01 - Financial Statements and Business Decisions

42. In a sole proprietorship the owner is often an employee of the business. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-S1 Describe the different types of business entities. Topic: 01-27 Appendix 1A: Types of Business Entities

43. A partnership is an incorporated entity that has more than one owner. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-S1 Describe the different types of business entities. Topic: 01-27 Appendix 1A: Types of Business Entities

44. Independent CPAs in the public practice of accounting are viewed as employees of their clients. FALSE

45. An audit involves the examination of the financial reports (prepared by the management of the company) to ensure that they represent what they claim and conform with IFRS. TRUE

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Chapter 01 - Financial Statements and Business Decisions

46. Many opportunities exist for managers to intentionally prepare misleading financial reports. TRUE

47. Failure to comply with professional rules of conduct can result in serious penalties for professional accountants, but not the rescinding of the professional designation of an offending member. FALSE

48. High ethical standards are required for preparers of financial information. TRUE

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Chapter 01 - Financial Statements and Business Decisions

Multiple Choice Questions 49. What is the primary purpose of the statement of financial position? A. To measure the profit of a business up to a particular point in time. B. To report the difference between cash inflows and cash outflows for the period. C. To report the financial position of the reporting entity at a particular point in time. D. To report assets at their current market value at a particular point in time.

50. On January 1, 20X1, two individuals invested $150,000 each to form Hornbeck Corporation. Hornbeck had total revenues of $15,000 during 20X1 and $40,000 during 20X2. Total expenses for the same periods were $8,000 and $22,000, respectively. Cash dividends paid out to shareholders totaled $6,000 in 20X1 and $12,000 in 20X2. What was the ending balance in Hornbeck's retained earnings account at the end of 20X1 and 20X2? A. $1,000 and $6,000 respectively. B. $1,000 and $7,000, respectively. C. $7,000 and $19,000 respectively. D. $301,000 and $306,000 respectively. Calculation: $15,000 - $8,000 - $6,000 = $1,000; $1,000 + $40,000 - $22,000 - $12,000 = $7,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-09 The Statement of Changes in Equity

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Chapter 01 - Financial Statements and Business Decisions

51. The HAT Corporation had revenues of $210,000, expenses of $85,000, and an income tax rate of 20 percent in 20X2. What would profit after taxes be? A. $5,000. B. $15,000. C. $20,000. D. $100,000. Calculation: ($210,000 - $85,000) ´ 80% = $100,000.

52. Brown Corporation reported the following amounts at the end of the first year of operations, December 31, 20X1: Share capital $20,000; Sales revenue $95,000; Total assets $85,000, No dividends, and Total liabilities $35,000. What would shareholders' equity and total expenses be? A. Shareholders' equity, $50,000 and expenses $65,000. B. Shareholders' equity, $60,000 and expenses $75,000. C. Shareholders' equity, $80,000 and expenses $40,000. D. Shareholders' equity, $80,000 and expenses $85,000. Calculation: $85,000 - $35,000 = $50,000; $20,000 + $95,000 - $50,000 = $65,000.

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Chapter 01 - Financial Statements and Business Decisions

53. All of the following are internal users of accounting data except: A. The president of a company. B. The controller of a company. C. Labour union for the company's employees D. A salesperson of a company.

54. If total liabilities increased by $25,000 and shareholders' equity increased by $5,000 during a period, then total assets must change by what amount and direction during that same period? A. $20,000 decrease. B. $20,000 increase. C. $25,000 increase. D. $30,000 increase. Calculation: $25,000 + $5,000 = $30,000.

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Chapter 01 - Financial Statements and Business Decisions

55. Which of the following activities involves raising the necessary funds to support the business? A. Operating. B. Investing. C. Financing. D. Marketing.

56. Buying assets needed to operate a business is an example of a(n) A. purchasing activity. B. financing activity. C. investing activity. D. operating activity.

57. The common characteristic possessed by all assets is A. long life. B. depreciation C. tangible nature. D. future economic benefit.

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Chapter 01 - Financial Statements and Business Decisions

58. Expenses are incurred A. only on rare occasions. B. to produce assets. C. to produce liabilities. D. to generate revenues.

59. The financial statement that summarizes the changes in contributed capital and retained earnings for a specific period of time is the A. statement of financial position. B. statement of earnings. C. statement of cash flows. D. statement of changes in equity.

60. Retained earnings at the end of the period is equal to A. retained earnings at the beginning of the period plus net earnings minus liabilities. B. retained earnings at the beginning of the period plus net earnings minus dividends. C. net earnings for the period D. assets plus liabilities.

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Chapter 01 - Financial Statements and Business Decisions

61. What form does financial accounting information provided by an entity to decision makers generally take? A. Financial statements. B. Various forecasts and performance reports. C. An analysis of changes in the price of a corporation's shares. D. Comparisons between the company and its competitors.

62. If the retained earnings account increases from the beginning of the year to the end of the year, then A. profit is greater than dividends. B. a loss is less than dividends. C. additional investments are less than reported losses. D. dividends were paid.

63. Shareholders' equity can be described as claims of A. creditors on total assets. B. owners on total assets. C. customers on total assets. D. debtors on total assets.

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Chapter 01 - Financial Statements and Business Decisions

64. Which financial statement would reveal whether the company relies more on debt or shareholders' equity to finance its assets? A. Statement of cash flows. B. Statement of changes in equity. C. Statement of earnings. D. Statement of financial position.

65. The statement of financial position and statement of changes in equity are related because A. the total assets on the statement of financial position is reported on the statement of changes in equity. B. the ending amount on the statement of changes in equity is reported on the statement of financial position. C. the ending amount on the statement of changes in equity is transferred to the statement of cash flows. D. both contain information for the corporation.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-15 Relationships among the Four Financial Statements

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Chapter 01 - Financial Statements and Business Decisions

66. Carrington Company owes you $500 on account due within 15 days. Which of the following amounts on its statement of financial position would help you to determine the likelihood that you will be paid in full and on time? A. Cash and trade receivables. B. Cash and property and equipment. C. Cash and inventory. D. Contributed capital and retained earnings.

67. The statement of cash flows and the statement of financial position are interrelated because A. the ending amount of cash on the statement of cash flows must agree with the amount on the statement of earnings. B. the ending amount of cash on the statement of cash flows must agree with the amount in the statement of changes in equity. C. the ending amount of cash on the statement of cash flows must agree with the amount in the statement of financial position. D. both disclose the corporation's profit.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-15 Relationships among the Four Financial Statements

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Chapter 01 - Financial Statements and Business Decisions

68. Which of the following are the two primary components of shareholders' equity? A. Non-current assets and liabilities B. Contributed capital and Retained earnings. C. Short term debt and retained earnings D. Long-term debt and retained earnings.

69. The statement of changes in equity is dependent on the results from A. the statement of cash flows. B. the statement of financial position. C. the statement of earnings. D. a company's share capital.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-15 Relationships among the Four Financial Statements

70. The primary purpose of the statement of cash flows is to report A. a company's investing transactions. B. a company's financing transactions. C. information about cash receipts and cash payments of a company. D. the net increase or decrease in cash.

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Chapter 01 - Financial Statements and Business Decisions

71. Speedy Car Repair Shop Ltd. started the year with total assets of $70,000 and total liabilities of $40,000. During the year, the business recorded $100,000 in car repair revenues, $65,000 in expenses, and dividends of $5,000. Shareholders' equity at the end of the year was A. $60,000. B. $65,000. C. $70,000. D. $75,000. Calculation: Beginning shareholders equity is 70000 - 40000 = 30000. Profit for the year was 100000 - 65000 = 35000. Ending SE is 30000 + 35000 - 5000 = 60000.

72. A service business' income statement is likely to have which one of the following as the largest figure? A. salaries expense B. equipment maintenance C. cost of goods sold D. income taxes

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Chapter 01 - Financial Statements and Business Decisions

73. The most significant expense for a merchandising company is A. salaries expense B. equipment maintenance C. cost of goods sold D. income taxes

74. On the statement of financial position, assets may be presented A. in order of liquidity B. in order of reverse liquidity C. either in order of liquidity or in order of reverse liquidity D. in alphabetical order

75. Retained earnings are A. the shareholders' claim on total assets. B. equal to cash. C. equal to revenues. D. the amount of profit kept in the corporation for future use.

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Chapter 01 - Financial Statements and Business Decisions

76. What are business liabilities? A. Amounts it expects to collect in the future from customers. B. Debts or obligations resulting from past business events. C. The amounts that owners have invested in the business. D. The increases in assets that result from profitable operations.

77. Why would EZ Bank, in deciding whether to make a loan to Davis Company, be interested in the amount of liabilities Davis has on its statement of financial position? A. The liabilities represent resources that could be used to repay the loan. B. If Davis already has many other obligations, it might not be able to repay the loan. C. Existing liabilities give an indication of how profitable Davis has been in the past. D. EZ bank would be interested in the amount of Davis's assets but not the amount of liabilities.

78. What are the two categories of shareholders' equity usually found on the statement of financial position of a corporation? A. Share capital and long-term liabilities. B. Share capital and property, plant, and equipment. C. Retained earnings and notes payable. D. Contributed capital and retained earnings.

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Chapter 01 - Financial Statements and Business Decisions

79. Jameson & Johnson Inc., recorded $250,000 of depreciation expense in December 20X6. The most likely effect on the company's accounting equation is A. no effect on assets. B. a decrease in assets of $250,000. C. an increase in liabilities of $250,000. D. an increase in assets of $250,000.

80. Allentown Corporation has on its statement of financial position the following amounts: Total assets of $3,500,000 Total liabilities of $500,000 Contributed capital of $1,000,000. What is the amount of retained earnings that should appear on Allentown's statement of financial position? A. $2,000,000. B. $3,000,000. C. $4,000,000. D. $5,000,000. Calculation: $3,500,000 - $500,000 - $1,000,000 = $2,000,000.

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Chapter 01 - Financial Statements and Business Decisions

81. Which financial statement for a business would you look at to determine the company's performance during an accounting period? A. Statement of financial position. B. Statement of cash flows. C. Statement of earnings. D. Statement of changes in equity.

82. Which of the following is not a principal type of business activity? A. Operating B. Investing C. Financing D. Delivering

83. How do most businesses earn revenues? A. When they collect trade receivables. B. Through sales of goods or services to customers. C. By borrowing money from a bank. D. By selling shares to shareholders.

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Chapter 01 - Financial Statements and Business Decisions

84. A group of individuals formed a new company with an investment of $100,000. The most likely effect of this transaction on the company's accounting equation at the time of the formation is an increase in cash and A. an increase in revenue. B. an increase in liabilities. C. an increase in owners' capital. D. an increase in assets.

85. During 20X2, its second year in operation, Banner Company delivered goods to customers for which customers paid or promised to pay $5,850,000. The amount of cash collected from customers was $5,960,000. The amount of trade receivables at the beginning of 20X2 was $1,200,000. What is the amount of sales revenue that Banner should report on its statement of earnings for 20X2? A. $4,650,000. B. $4,760,000. C. $5,850,000. D. $5,960,000.

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Chapter 01 - Financial Statements and Business Decisions

86. During 20X2, its second year in operation, Banner Company delivered goods to customers for which customers paid or promised to pay $5,850,000. Assume all sales were on account and the amount of cash collected from customers was $5,960,000. The amount of trade receivables at the beginning of 20X2 was $1,200,000. Based on this information, what is the amount of trade receivables that Banner would report at the end of 20X2? A. $110,000. B. $1,090,000. C. $1,310,000. D. $5,850,000. Calculation: $1,200,000 + $5,850,000 - $5,960,000 = $1,090,000.

87. What is the amount of revenue recognized in the statement of earnings by a company that sells goods to customers? A. The cash collected from customers during the current period. B. Total sales, both cash and credit sales, for the period. C. Total sales minus beginning amount of trade receivables. D. The amount of cash collected plus the beginning amount of trade receivables.

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Chapter 01 - Financial Statements and Business Decisions

88. The statement of cash flows and the statement of financial position are interrelated because A. the ending amount of cash on the statement of cash flows must agree with the amount in the statement of changes in equity. B. the ending amount of cash on the statement of cash flows must agree with the amount in the statement of financial position. C. both disclose the corporation's profit. D. the ending amount of cash on the statement of cash flows must agree with the amount on the statement of earnings.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-15 Relationships among the Four Financial Statements

89. On January 1, 20X1, Taylor Corporation had retained earnings of $6,500,000. During 20X1, Taylor had profit of $1,050,000 and dividends of $450,000. What is the amount of Taylor's retained earnings at the end of 20X1? A. $6,050,000. B. $6,950,000. C. $7,100,000. D. $7,550,000. Calculation: $6,500,000 + $1,050,000 - $450,000 = $7,100,000.

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Chapter 01 - Financial Statements and Business Decisions

90. What are the categories of cash flows that appear on a statement of cash flows? A. Cash flows from investing, financing, and service activities. B. Cash flows from operating, production, and internal activities. C. Cash flows from financing, production, and growth activities. D. Cash flows from operating, investing, and financing activities.

91. Borrowing money is an example of a(n) A. marketing activity B. financing activity. C. investing activity. D. operating activity.

92. On the statement of cash flows, how would a company report the purchase of machinery? A. As cash used in operating activities. B. As cash used in financing activities. C. As cash used in purchasing activities. D. As cash used in investing activities.

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Chapter 01 - Financial Statements and Business Decisions

93. When would a company report a net loss? A. When retained earnings decreased due to paying dividends to shareholders. B. When its assets decreased during an accounting period. C. When its liabilities increased during an accounting period. D. When its expenses exceeded its revenues for an accounting period.

94. Which of the following is the amount of rent expense reported on the statement of earnings? A. The amount of cash paid for rent in the current period. B. The amount of cash paid for rent in the current period less any unpaid rent at the end of the period. C. The amount of rent used up in the current period to earn revenue. D. The amount of cash paid for rent for the future period.

95. What events cause changes in a corporation's retained earnings? A. Profit or loss and declaration of dividends. B. Declaration of dividends and issuance of shares to new shareholders. C. Profit issuance of shares, and borrowing from a bank. D. Declaration of dividends and purchase of new machinery.

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Chapter 01 - Financial Statements and Business Decisions

96. The statement of financial position A. reports the changes in assets, liabilities, and shareholders' equity over a period of time. B. reports the assets, liabilities, and shareholders' equity at a specific date. C. presents the revenues and expenses for a specific period of time. D. summarizes the changes in retained earnings for a specific period of time.

97. If you wanted to know how much of its profit a corporation distributed as dividends, which financial statement would you look at? A. Statement of financial position. B. Statement of earnings. C. Statement of cash flows. D. Statement of changes in equity.

98. Why is the operating activities section often believed to be the most important part of a statement of cash flows? A. It gives the most information about how operations have been financed. B. It shows the dividends that have been paid to shareholders. C. It indicates a company's ability to generate cash from sales to meet current cash needs. D. It shows the net increase or decrease in cash during the period.

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Chapter 01 - Financial Statements and Business Decisions

99. If you wanted to know what accounting rules a company follows related to its inventory, where would you look? A. The statement of financial position. B. The statement of earnings. C. The notes to the financial statements. D. The headings to the financial statements.

100. During 20X1, Burton Company delivered products to customers for which customers promised to pay $3,820,000. The company collected $3,670,000 in cash from customers during the year. Indicate which of these amounts will appear on the statement of earnings and which on the statement of cash flows. A. $3,670,000 appears on both the statement of earnings and the statement of cash flows. B. $3,670,000 appears on the statement of cash flows, and $3,820,000 appears on the statement of earnings. C. $3,820,000 appears on both the statement of earnings and the statement of cash flows. D. $3,820,000 appears on the statement of cash flows, and $3,670,000 appears on the statement of earnings.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-15 Relationships among the Four Financial Statements

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Chapter 01 - Financial Statements and Business Decisions

101. At the beginning of 20X2, Rodriguez Corporation had assets of $820,000 and liabilities of $340,000. During the year, assets increased by $40,000 and liabilities decreased by $8,000. What was total shareholders' equity at the end of 20X2? A. $432,000. B. $480,000. C. $528,000. D. $1,208,000. Calculation: ($820,000 + $40,000) - ($340,000 - $8,000) = $528,000.

102. What term is used for probable future economic benefits owned by an entity, and obtained as the result of past transactions? A. Assets. B. Liabilities. C. Revenues. D. Retained earnings.

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Chapter 01 - Financial Statements and Business Decisions

103. Prepaid rent is A. an asset on the statement of financial position B. a liability on the statement of financial position C. part of shareholder's equity on the statement of financial position D. not on the statement of financial position.

104. What results from the purchase of goods or services on credit and from borrowing? A. Assets. B. Liabilities. C. Share capital. D. Revenues.

105. How are the differing claims of creditors and investors recognized by a corporation? A. The claims of creditors are liabilities; those of investors are assets. B. The claims of both creditors and investors are liabilities, but only the claims of investors are long term. C. The claims of creditors are liabilities; the claims of investors are recorded as shareholders' equity. D. The claims of creditors and investors are essentially equivalent.

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Chapter 01 - Financial Statements and Business Decisions

106. The statement of financial position is also known as A. The balance sheet B. The trial balance C. The unbalance sheet D. The statement of operations

107. In what order are assets are listed on a statement of financial position? A. Dollar amount (largest first). B. Date of acquisition (earliest first). C. Ease of conversion to cash. D. Importance to the operation of the business.

108. In what order, would the assets of Any Company be listed on their statement of financial position? A. Cash, Trade Receivables, Inventory, Plant and Equipment. B. Cash, Inventory, Trade Receivables, Plant and Equipment. C. Cash, Trade Receivables, Marketable Securities, Inventory. D. Cash, Trade Receivables, Plant and Equipment, Inventory.

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Chapter 01 - Financial Statements and Business Decisions

109. The ending retained earnings balance of the Brown Hat restaurant chain increased by $4.3 billion from the beginning of the year. The company had declared a dividend of $1.5 billion. What was the profit earned during the year? A. $2.8 billion. B. $3.0 billion. C. $5.8 billion. D. There is no way to determine net income as not enough information was given. Calculation: $4.3 billion + $1.5 billion = $5.8 billion.

110. What section of the statement of cash flows do bankers consider to be the most important? A. Investing. B. Operating. C. Financing. D. All the sections are equally important.

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Chapter 01 - Financial Statements and Business Decisions

111. Which of the following statements is TRUE? A. Publicly traded enterprises must use IFRS for external reporting purposes. B. The Accounting Standards Board is a government body. C. The SEC is the most influential Canadian regulator of the flow of financial information provided by publicly traded companies in Canada. D. Publicly traded enterprises must use the accounting standards prescribed for private enterprises for external reporting.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-19 International Financial Reporting Standards (IFRS)

112. Which of the following activities would cause investors to overpay for the acquisition of a company from its current owners? A. Understated trade payables and overstated inventory. B. Understated revenues and overstated expenses. C. Understated assets and overstated expenses. D. Understated assets and overstated revenues.

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Chapter 01 - Financial Statements and Business Decisions

113. Which of the following statements is true about the price earnings (P/E) ratio? A. It is a ratio of importance to creditors. B. A high P/E ratio indicates investors have little confidence in the future profit potential of the company. C. The P/E ratio could be used to approximate the value investors would be willing to pay for the company's acquisition from existing owners. D. The P/E ratio increases as profit increases.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-18 Responsibilities for the Accounting Communication Process

114. Which government regulatory agency has the legal authority to prescribe financial reporting requirements for corporations that sell their securities in Canadian stock exchanges in the province of Ontario? A. AcSB. B. CRA. C. OSC. D. CICA.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-18 Responsibilities for the Accounting Communication Process

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Chapter 01 - Financial Statements and Business Decisions

115. Which securities regulator in the province of Ontario has broad powers to determine measurement rules for financial statements of publicly traded companies on the Toronto Stock Exchange? A. The Canada Revenue Agency. B. The Ontario Securities Commission. C. The Federal Accounting Office. D. The Supreme Court.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-18 Responsibilities for the Accounting Communication Process

116. Financial statements are prepared for the user. Which of the following best describes the responsibility for the preparation of financial statements? A. It is the responsibility of external auditors. B. It is the responsibility of shareholders. C. It is the responsibility of management. D. It is the responsibility of standard setters.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-18 Responsibilities for the Accounting Communication Process

117. With whom does primary responsibility for the information in a corporation's financial statements rest? A. The shareholders of the corporation. B. The managers of the corporation. C. The Ontario Securities Commission. D. The public accountant who audited the financial statements.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-18 Responsibilities for the Accounting Communication Process

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Chapter 01 - Financial Statements and Business Decisions

118. What is an examination of the financial statements of a business to ensure that they conform with international financial reporting standards called? A. A certification. B. An audit. C. A verification. D. A validation.

119. What is the purpose of an audit? A. To prove the accuracy of an entity's financial statements. B. To lend credibility to an entity's financial statements. C. To endorse the quality of leadership that managers provide for a corporation. D. To establish that a corporation's shares are a sound investment.

120. Why do the managers of a corporation hire independent auditors? A. To guarantee annual and quarterly financial statements. B. To handle some personnel issues and problems. C. To audit and report on the fairness of financial statement presentation. D. To lobby the AcSB for changes in generally accepted accounting principles.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-22 Ensuring the Accuracy of Financial Statements

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Chapter 01 - Financial Statements and Business Decisions

121. Why is the auditor's role in performing audits, important to our society? A. Auditors provide direct financial advice to potential investors. B. Auditors have the primary responsibility for the information contained in financial statements. C. Auditors issue reports on the accuracy of each financial transaction. D. An audit of financial statements helps investors and others to know that they can rely on the information presented in the financial statements.

122. What is one of the disadvantages of a corporation, when compared to a partnership? A. The shareholders have limited liability. B. The shareholders are treated as a separate legal entity from the corporation. C. The corporation and its shareholders are potentially subject to double taxation. D. The corporation provides continuity of life.

123. Which of the following statements is true about a sole proprietorship? A. The owner and the business are separate legal entities but not separate accounting entities. B. The owner and the business are separate accounting entities but not separate legal entities. C. The owner and the business are separate legal entities and separate accounting entities. D. Most large businesses in this country are organized as sole proprietorships.

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Chapter 01 - Financial Statements and Business Decisions

124. For a business organized as a general partnership, which statement is true? A. The owners and the business are separate legal entities. B. Each partner is potentially responsible for the debts of the business. C. Formation of a partnership requires getting a charter from the province of incorporation. D. A partnership is not considered to be a separate accounting entity.

125. For what reason might a group of people establishing a business prefer to set it up as a corporation rather than a partnership? A. To have limited liability. B. To avoid double taxation. C. Because of ease of formation. D. To avoid complex reporting procedure for government agencies

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Chapter 01 - Financial Statements and Business Decisions

Short Answer Questions 126. Indicate whether each of the following parties is an "internal" or "external" user of financial statements. a) Creditor b) Company Human Resources c) Shareholders d) Mutual fund manager e) Canada Revenue Agency f) Labour union a) E b) I c) E d) E e) E f) E

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Chapter 01 - Financial Statements and Business Decisions

127. Identify which of the following accounts appear on a statement of financial position. (a) Service revenue (b) Cash (c) Common shares (d) Accounts payable (e) Rent expense (f) Supplies (g) Land (h) Dividends (i) Prepaid insurance (b), (c), (d), (f), (g), (i)

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Chapter 01 - Financial Statements and Business Decisions

128. For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or shareholders' equity item.

Asset Liability Shareholders’ Equity

Code A L SE

_____ 1. Rent expense _____ 2. Office equipment _____ 3. Trade payables _____ 4. Common shares _____ 5. Insurance expense _____ 6. Cash

_____ 7. Trade receivables _____ 8. Retained earnings _____ 9. Service revenue _____ 10. Bank loan payable _____ 11. Dividends _____ 12. Unearned revenue

Please review the following information:

1. SE 2. A 3. L 4. SE 5. SE 6. A

7. A 8. SE 9. SE 10. L 11. SE 12. L

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Chapter 01 - Financial Statements and Business Decisions

129. Classify each of these items as an asset (A), liability (L), or shareholders' equity (SE).

_____ 1. Rent receivable _____ 2. Salaries expense _____ 3. Preferred shares _____ 4. Office supplies _____ 5. Retained earnings

_____ 6. Income tax payable _____ 7. Mortgage payable _____ 8. Land _____ 9. Dividends _____ 10. Office supplies expense

Please review the following information:

1. A 2. SE 3. SE 4. A 5. SE

6. L 7. L 8. A 9. SE 10. SE

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Chapter 01 - Financial Statements and Business Decisions

130. Match each definition with its related term or abbreviation by entering the appropriate letter in the space provided. _____ 1. OSC _____ 2. CICA _____ 3. AcSB _____ 4. CPA _____ 5. IFRS Term or Abbreviation Definition A. A system that collects and processes financial information about an organization and reports that information to decision makers. B. Measurement of information about an entity in the monetary unit-dollars or other national currency. C. An unincorporated business owned by two or more persons. D. The organization for which financial data are to be collected (separate and distinct from its owners). E. An incorporated entity that issues shares as evidence of ownership. F. Initial recording of financial statement elements at acquisition cost. G. An examination of the financial reports to assure that they represent what they claim and conform with international financial reporting standards. H. Chartered Professional Accountant. I. An unincorporated business owned by one person. J. A report that describes the auditors' opinion of the fairness of the financial statement presentations and the evidence gathered to support that opinion. K. Ontario Securities Commission. L. Accounting Standards Board. M. Company that can be bought and sold by investors on established stock exchanges. N. International financial reporting standards O. Canadian Institute of Chartered Accountants. 1. K; 2. O; 3. L; 4. H; 5. N

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Chapter 01 - Financial Statements and Business Decisions

131. Using the income statement model and the statement of financial position model, fill-in the missing amounts for each independent case below. Assume the amounts given are at the end of the first full year of operations of the company.

Case A B C D E

Total Revenue $500,000 75,000 $ 250,000 $

Total Assets $300,000 $ 145,000 375,000 $

Total Expenses $425,000 $ 70,000 200,000 64,000

Total Profit (Loss) Shareholders' Liabilities Equity $110,000 $ $ 70,000 15,000 55,000 $ (10,000) 90,000 60,000 $ $ 88,000 3,000 65,000

Please review the following information:

Case A B C D E

Total Revenue

Total Assets

$125,000

Total Expenses

Profit (Loss) $75,000

Shareholder s' Equity $190,000

$50,000

$315,000

$60,000

$60,000 $67,000

Total Liabilities

$55,000 $153,000

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Chapter 01 - Financial Statements and Business Decisions

132. Plants Supreme, Inc., a small retail store which sells house plants, started business on January 1, 20X1. At the end of January, 20X1, the following information was available:

Sales of plants for cash Sales of plants for credit Cost of plants which were sold and paid for during January

$50,000 3,000 30,000

Cash expenditures during January:

Salaries Telephone Office Supplies (all used) Electricity Rent on the store for January, 20X1 (will not be paid until February, 20X1)

$4,500 100 100 200 800

A. Using the above information, prepare the income statement for Plants Supreme for the month ended January 31, 20X1. B. What is the amount of cash flows provided by operating activities to be presented on the statement of cash flows? Plants Supreme, Inc. Income Statement For the Month Ended January 31, 20X1

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Chapter 01 - Financial Statements and Business Decisions

Revenue ($50,000 + $3,000) Expenses: Cost of goods sold Salaries Telephone Office supplies used Electricity Rent Profit

$53,000 $30,000 4,500 100 100 200 800 35,700 $17,300

B. $17,300 - $3,000 + $800 = $15,100 OR $50,000 - $30,000 - $4,500- $100 - $100 - $200 = $15,100

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Chapter 01 - Financial Statements and Business Decisions

133. Calculate the missing amount in each category of the accounting equation.

(a) (b) (c)

Assets $360,000 $178,000 $?

Liabilities $? $73,000 $302,000

Shareholders' Equity $98,000 $? $310,000

(a) $262,000 ($360,000 - $98,000 = $262,000). (b) $105,000 ($178,000 - $73,000 = $105,000). (c) $612,000 ($302,000 + $310,000 = $612,000).

134. Indicate which of the following statements are accurate: A. The statement of financial position is prepared after the income statement is prepared. B. A company's cash balance at the end of an accounting period is found only on the statement of financial position. C. The issuance of shares would affect all four of the financial statements. D. The payment of dividends reduces income for the period. E. Unearned revenue is an account found on the statement of financial position. A, E

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Chapter 01 - Financial Statements and Business Decisions

135. Birch Corporation's shareholders' equity equals one-fifth of the company's total assets. The company's liabilities are $125,000. What is the amount of the company's shareholders' equity? $31,250 (X = 1/5X + $125,000) Where X = total assets Solving for X X - 1/5X = $125,000 Shareholder's equity = (1/5) ´ $156,250 = $31,250 4/5X = $125,000 X = $125,000 ´ 5/4 X = $156,250 Proof: $31,250 + $125,000 = $156,250

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Chapter 01 - Financial Statements and Business Decisions

136. Lopez Corporation began operations at the start of 20X3. During the year, it made cash and credit sales totaling $974,000 and collected $860,000 in cash from its customers. It purchased inventory costing $508,000, paid $25,000 for dividends and the cost of goods sold was $445,000. The corporation incurred the following expenses:

Salary expense Interest expense Insurance expense Supplies expense Income tax expense

$180,000 15,000 10,000 18,000 65,000

Required: 1. Prepare an income statement showing revenues, expenses, pretax profit, income tax expense, and profit for the year ended December 31, 20X3. 2. Based on the above information, what is the amount of trade receivables on the statement of financial position prepared at the end of 20X3? 3. Based on the above information, what is the amount of retained earnings on the statement of financial position prepared at the end of 20X3? 1. Lopez Corporation Income Statement For the Year Ended December 31, 20X3

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Chapter 01 - Financial Statements and Business Decisions

Revenues: Sales Total revenues Expenses: Cost of goods sold Salary expense Supplies expense Interest expense Insurance expense Total expenses Pretax profit Income tax expense Profit

$974,000 $974,000 445,000 180,000 18,000 15,000 10,000 668,000 306,000 65,000 $241,000

2. $974,000 - 860,000 = $114,000 trade receivables at the end of the year. 3. $0 beginning amount + $241,000 profit - $25,000 dividends = $216,000.

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Chapter 01 - Financial Statements and Business Decisions

137. Delft Corporation was established on December 31, 20X1, by a group of investors who invested a total of $100,000 for shares of the new corporation. During the month of January, 20X2, Delft provided services to customers for which the total revenue was $40,000. Of this amount, $4,500 had not been collected by the end of January. Delft recorded salary expense of $17,000, of which 90% had been paid by the end of the month; rent expense of $3,000, which had been paid on January 1, 20X2; and other expenses of $8,500, which had been paid by check. On January 31, 20X2, Delft purchased a van by paying cash of $25,000. There were no other events that affected cash. Required: 1. In which section of the statement of cash flows would the amount of cash paid for salaries be reported? 2. In which section of the statement of cash flows would the amount of cash paid for the van be reported? 3. By how much did Delft's cash increase or decrease during January? 4. If the amount of cash was $100,000 at the beginning of January, how much cash did Delft have at the end of the month? 5. What was Delft's profit or loss (after income tax expense) for the month of January? The income tax rate was 25%. 6. Explain why the net increase or decrease in cash for a business generally will be different than the profit, or net loss, for the same period. 1. Cash used in operating activities 2. Cash used in investing activities 3. Amount collected from customers Payment of salaries Payment of rent Payment of other expenses Payment for van Decrease in cash

$35,500 (15,300) (3,000) (8,500) (25,000) $(16,300)

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Chapter 01 - Financial Statements and Business Decisions

4. Amount of cash at the end of January: $100,000 - 16,300 = $83,700 5. Revenues Less expenses: Salaries expense Rent expense Other expenses Income before taxes Income taxes Profit

$40,000 $17,000 3,000 8,500

28,500 11,500 2,875 $8,625

6. Profit or loss for a period is equal to revenues minus expenses; it is not equal to the change in cash. Revenues are reported on the income statement when the goods or services are sold to the customer, which may be before or after the period in which cash is received from the customer. Expenses are reported on the income statement in the period they are used to earn revenues. Again, the payment of cash may occur before or after the period when an expense appears on the income statement.

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Chapter 01 - Financial Statements and Business Decisions

138. Hot tub Supply, Inc., reported the following items for the year ended December 31, 20X9:

Wages and salary expense Cost of goods sold Rent expense Sales revenue Interest expense Income tax expense Trade receivables Bank Loan

$825,000 1,400,000 490,000 3,417,000 50,000 161,000 45,000 500,000

Required: Prepare an income statement for the year. Hot tub Supply, Inc. Income Statement For the Year Ended December 31, 20X9

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Chapter 01 - Financial Statements and Business Decisions

Revenue: Sales revenue Total revenues Expenses: Cost of goods sold Wages and salary expense Rent expense Interest expense Total expenses Pretax profit Income tax expense Profit

$3,417,000 $3,417,000 1,400,000 825,000 490,000 50,000 2,765,000 652,000 161,000 $491,000

Note: Trade receivables of $25,000 would appear on the statement of financial position, not on the income statement. Bank Loan would also be on the statement of financial position.

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Chapter 01 - Financial Statements and Business Decisions

139. Empire Stores, Ltd., reported the following amounts on its statement of financial position on December 31, 20X2:

Inventory Notes payable Cash Share capital Net property, plant and equipment Trade receivables Trade payables Retained earnings

$710,000 160,000 300,000 900,000 425,000 88,000 131,000 ?

Required: 1. What is the amount of Empire's total assets at the end of 20X2? 2. Identify the items listed above that are liabilities. 3. What is the amount of Empire's retained earnings at the end of 20X2? 4. Prepare a statement of financial position for Empire Stores as of December 31, 20X2. 5. Empire Stores wishes to purchase merchandise from your company on account. The amount of the purchases would probably be about $5,000 per month, and the terms would require Empire to make payment in full within 30 days. Would you recommend that your company grant credit to Empire under these terms? Explain the reasoning for your response. 1. Total assets = $710,000 + 300,000 + 425,000 + 88,000 = $1,523,000 2. Liabilities: Trade payables and Notes payable. 3. Assets = Liabilities + Shareholder's equity $1,523,000 = (131,000 + 160,000 + Shareholder's equity) Shareholder's equity = $1,232,000 = Share capital + retained earnings $900,000 + retained earnings = $1,232,000 Retained earnings = $332,000 4. Empire Stores, LTD Statement of Financial Position At December 31, 20X2 (in dollars)

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Chapter 01 - Financial Statements and Business Decisions

Assets Cash Trade receivables Inventory Net property, plant and equipment Total Assets

$300,000 88,000 710,000 425,000 $1,523,000

Liabilities Trade payables Notes payable (long-term) Total liabilities Shareholders' Equity Share capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

$131,000 160,000 $291,000

$900,000 332,000 $1,232,000 $1,523,000

5. The statement of financial position of Empire Stores shows that the company can pay its short-term liabilities. There is cash of $300,000, more than enough to settle the accounts payable of $131,000. I would recommend that my company grant credit to Empire Stores.

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Chapter 01 - Financial Statements and Business Decisions

140. During 20X2, Whistler Company performed services for which customers promised to pay $286,000. Of this amount, $270,000 had been collected by year end. Whistler paid $125,000 in cash for employee wages and owed the employees $5,000 at the end of the year for work that had been done but had not paid for. Whistler paid interest expense of $1,700 and $80,000 for other service expenses. The income tax rate was 30%, and income taxes had not yet been paid at the end of the year. Whistler declared and paid dividends of $20,000. There were no other events that affected cash. Required: 1. What was the amount of the increase or decrease in cash during the year? 2. Prepare an income statement for Whistler for the year. 3. Are you surprised the two numbers are different? Why or why not? 1. Amount of increase or decrease in cash:

$270,000 -125,000 -1,700 -80,000 -20,000 $43,300

Collected from customers Paid to employees Interest expense Other service expense Dividends Increase in cash

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Chapter 01 - Financial Statements and Business Decisions

2. Whistler Company Income Statement For the Year Ended December 31, 20X2

Revenues Service revenues Total Revenues Expenses Wages expense Service expense Interest expense Total expense Pretax profit Income tax expense Net income

$286,000 286,000 130,000 80,000 1,700 211,700 74,300 22,290 $52,010

3. Not surprising because tracking a change in cash is not the same as measuring accrual accounting income. The discipline of accounting is based on accruals.

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Chapter 01 - Financial Statements and Business Decisions

141. Poirier Company manufactures infant 's clothing. During 20X9, the company reported the following items that affected cash. Indicate whether each of these items is a cash flow from operating activities (O), investing activities (I), or financing activities (F).

Description Purchased equipment by paying cash Collected cash on account from customers Paid dividends to shareholders Paid cash for supplies Paid suppliers for fabric Purchased insurance for factory Borrowed money from bank on a long-term note Paid interest to bank on the note Paid wages to employees Sold shares to new shareholders

Classification

Answer: Purchased equipment by paying cash: I Collected cash on account from customers: O Paid dividends to shareholders: F Paid cash for supplies: O Paid suppliers for fabric: O Purchased insurance for factory: O Borrowed money from bank on a long-term note: F Paid interest to bank on the note: O Paid wages to employees: O Sold shares to new shareholders: F

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Chapter 01 - Financial Statements and Business Decisions

142. Fulton Company was established on January 1, 20X4 when several investors paid a total of $200,000 to purchase Fulton shares. No additional investments in shares were made during the year. By the end of that year, Fulton had cash on hand of $45,000, office equipment (net) of $40,000, inventories of $156,000, and trade payables of $10,000. Sales for the year were $812,000. Of this amount, customers still owed $20,000. Fulton paid dividends of $25,000 to its investors. Required: 1. Based on the information above, prepare a statement of financial position for Fulton Company as at December 31, 20X4. In the process of preparing the statement, you must calculate the ending balance in retained earnings. 2. What was the amount of Fulton's profit for the year? 3. Was Fulton successful during its first year in operation? 1. Fulton Company Statement of Financial Position At December 31, 20X4

Assets Cash Trade receivables Inventories Office Equipment (net) Total Assets

$45,000 20,000 156,000 40,000 $261,000

Liabilities Trade payables

$10,000

Shareholders' Equity Share capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

$200,000 51,000 251,000 $261,000

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Chapter 01 - Financial Statements and Business Decisions

2. Retained earnings, January 1, 20X4 Profit (plug) Dividends to shareholders Retained earnings, December 31, 20X4

$-076,000 (25,000) $51,000

3. Yes, Fulton's first year was successful. The company earned a healthy amount of profit, and many new companies have losses during their early years of operations. Also, it was able to pay dividends to its shareholders. At the end of the first year, the company has just $10,000 in liabilities. It appears to be in sound financial condition.

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Chapter 01 - Financial Statements and Business Decisions

143. For Kiddy Fashions, the following information is available for the year ended December 31, 20X9:

Sales revenue Cost of goods sold Salaries expense Income tax payable Rent expense Administrative expense

$5,500,000 2,800,000 1,100,000 5,000 620,000 490,000

The income tax rate is 35%. Required: Prepare an income statement for Kiddy Fashions. Kiddy Fashions Income Statement For the Year Ended December 31, 20X9

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Chapter 01 - Financial Statements and Business Decisions

Revenue: Sales revenue Total revenue Expenses (excluding income taxes): Cost of goods sold Salaries expense Rent expense Administrative expense Total expenses Pretax profit Less income tax expense Profit

$5,500,000 $5,500,000 2,800,000 1,100,000 620,000 490,000 5,010,000 490,000 171,500 $318,500

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Chapter 01 - Financial Statements and Business Decisions

144. The following data was taken from the books of Assiniboine Inc. as of December 31, 20X9:

Cost of goods sold Income tax expense Cash Dividends Interest expense Amortization expense

$15,300 Selling & admin expense 6,120 Accounts payable 3,500 Common shares, (6,500 shares) 6,000 Other income 900 Sales revenue 1,500 Retained earnings

Prepare an income statement for Assiniboine Inc. Assiniboine Inc. Income Statement For the Year Ended December 31, 20X9

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$3,500 12,000 20,000 1,500 50,000 8,000

Chapter 01 - Financial Statements and Business Decisions

Sales Other income Total revenues Costs and expenses: Cost of goods sold Selling & administrative expense Interest expense Amortization expense Total costs and expenses Earnings before taxes Income taxes Net income

$50,000 1,500 51,500 15,300 3,500 900 1,500 21,200 30,300 6,120 $24,180

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Chapter 01 - Financial Statements and Business Decisions

145. Baseline Corporation was formed two years ago, to manufacture fitness equipment. It has been profitable and is growing rapidly. It currently has 150 shareholders and 90 employees; most of the employees own at least a few shares of Baseline's shares. The company has received financing from two banks. It will sell additional shares within the next three months and will also seek additional loans and hire new employees to support its continued growth. Required: 1. Explain who relies on the information in financial statements prepared by Baseline Corporation. 2. Why is compliance with international financial reporting standards and accuracy in accounting important for Baseline? 3. A new accountant who tried to prepare Baseline's financial statements at the end of the current year made several errors. For each of the following items, indicate how the income statement and statement of financial position are affected by the error and the nature of the effect. (For example, an error might cause revenues and net income on the income statement and retained earnings and assets on the statement of financial position to be overstated). Ignore the effects of income taxes. A. The company had sales for cash of $3,000,000. It also had sales on account of $1,800,000 that had been collected by the end of the year, and sales on account of $200,000 that are expected to be collected early the following year. The accountant reported total sales revenue of $4,800,000. B. The company had total inventories of $600,000 at the end of the year. Of this amount, inventory reported at $30,000 was obsolete and will have to be scrapped. The statement of financial position prepared by the accountant showed total inventories of $600,000. C. The company has a bank loan for which interest expense during the year of $10,000 will be paid early in January of the next year. The accountant did not record either the interest expense or the related liability.

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Chapter 01 - Financial Statements and Business Decisions

1. Various external decision makers rely on the financial statements of a corporation. For Baseline, these decision makers include the bankers who have loaned money to the company. These creditors would monitor the performance of Baseline to estimate the likelihood that Baseline will be able to repay existing loans when they come due, and to decide whether to make additional loans to Baseline in the future. Current shareholders would want to review Baseline's financial statements to decide whether they wanted to continue to own Baseline's shares. Potential shareholders and creditors would use the information to decide whether they wanted to purchase Baseline's shares or loan money to the company in the future. Baseline anticipates hiring additional workers in the near future; potential employees might use information in the financial statements to evaluate the company as an employer. 2. Compliance with international financial reporting standards and accuracy in accounting are important to Baseline because they are important to the people who use Baseline's financial statements. To maintain the credibility of its financial statements, Baseline must comply with IFRS and must ensure the accuracy of its accounting records. 3. A. On the income statement, revenues are understated by $200,000 and profit is understated. On the statement of financial position, trade receivables and retained earnings are understated. B. On the statement of financial position, inventory and retained earnings are overstated by $30,000. On the income statement, expenses are understated and profit is overstated. C. On the income statement, expenses are understated and profit is overstated by $10,000. On the statement of financial position, interest payable is understated and retained earnings are overstated.

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Hard Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-02 The Statement of Financial Position Topic: 01-06 The Statement of Earnings Topic: 01-18 Responsibilities for the Accounting Communication Process Topic: 01-19 International Financial Reporting Standards (IFRS)

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Chapter 01 - Financial Statements and Business Decisions

146. Lloyd Company ends the first year of operations with $2.2 million in retained earnings when no dividends were paid out. Since the company began operations on January 1st, 20X2 of the current year ending December 31st, 20X2 calculate the amount of beginning retained earnings and explain your answer. The beginning balance of retained earnings is zero because a new business would not have generated income from prior operations. Retained earnings represents the profit generated through operations not distributed in the form of a dividend. A company just beginning operations could not have any profit so there would always be a zero beginning balance for new companies.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

Chapter 02 Investing and Financing Decisions and the Statement of Financial Position

True / False Questions 1. Qualitative characteristics of accounting information are not part of the conceptual framework of accounting. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-01 Define the objective of financial reporting, the qualitative characteristics of accounting information, and the related key accounting assumptions and principles. Topic: 02-02 Concepts Emphasized in Chapter 2

2. If you trade your computer plus cash for a new car, the cost of the new car is equal to the cash paid plus the market value of the computer. TRUE

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-01 Define the objective of financial reporting, the qualitative characteristics of accounting information, and the related key accounting assumptions and principles. Topic: 02-01 Overview of Accounting Concepts

3. Faithful representation means information must be free from material error, neutral and complete. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-01 Define the objective of financial reporting, the qualitative characteristics of accounting information, and the related key accounting assumptions and principles. Topic: 02-02 Concepts Emphasized in Chapter 2

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

4. The unit-of-measure assumption states that financial information is reported in the national monetary unit. TRUE

5. The separate-entity assumption assumes a stable monetary unit (not affected by inflation or deflation). FALSE

6. Three of the four basic assumptions that underlie accounting measurement and reporting relate to the statement of financial position. TRUE

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

7. The amount shown on the statement of financial position as shareholders' equity represents the current market value of the owners' residual claim against the company. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-02 Define the elements of a classified statement of financial position and analyze how the information is relevant to investors and other decision makers. Topic: 02-14 Elements of the Classified Statement Financial Position

8. Prepaid expenses and cash are both listed as current assets. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-02 Define the elements of a classified statement of financial position and analyze how the information is relevant to investors and other decision makers. Topic: 02-14 Elements of the Classified Statement Financial Position

9. Assets are economic resources owned and controlled by an entity as a result of past transactions or events and for which future economic benefits may be obtained. TRUE

10. A dividend payment will reduce net income for the period. FALSE

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

11. Liability accounts are reported on the statement of financial position. TRUE

12. The basic system of recording transactions has withstood the test of time, and has been in use for more than 500 years. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-03 Identify what constitutes a business transaction, and recognize common account titles used in business. Topic: 02-17 Accounts

13. An individual accounting record for a specific asset, liability or shareholders' equity item is called an account. TRUE

14. Long-term investments appear in the property, plant, and equipment section of the balance sheet. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 02-03 Identify what constitutes a business transaction, and recognize common account titles used in business. Topic: 02-16 Nature of Business Transactions

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

15. On the income statement, assets should always equal liabilities plus shareholders' equity. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-04 Apply the transaction analysis model routine, simple business transactions in terms of the accounting equation: Assets = Liabilities + Shareholders' Equity. Topic: 02-18 How Do Transactions Affect Accounts?

16. All transactions have a dual economic effect on the fundamental accounting model. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-04 Apply the transaction analysis model routine, simple business transactions in terms of the accounting equation: Assets = Liabilities + Shareholders' Equity. Topic: 02-19 Principles of Transaction Analysis

17. The payment of a liability in cash will decrease shareholders' equity. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 02-04 Apply the transaction analysis model routine, simple business transactions in terms of the accounting equation: Assets = Liabilities + Shareholders' Equity. Topic: 02-18 How Do Transactions Affect Accounts?

18. It is possible for a recording mistake to exist even if the accounting equation balances. TRUE

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

19. If the correct accounts have been identified and the appropriate direction of the effect on each account has been determined, then the equation should remain in balance. TRUE

20. The purchase of a delivery truck for cash increases assets and shareholders' equity. FALSE

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-04 Apply the transaction analysis model routine, simple business transactions in terms of the accounting equation: Assets = Liabilities + Shareholders' Equity. Topic: 02-18 How Do Transactions Affect Accounts?

21. Recording the borrowing of cash with a note payable requires immediate recording of interest expense on the income statement. FALSE

22. When a business owner invests cash in the business, the investment causes shareholders' equity to increase. TRUE

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

23. When a business pays a previously recorded bill, the liabilities of the business decrease. TRUE

24. The objective of transaction analysis is to determine the economic effects of each transaction in terms of the accounting model. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 02-04 Apply the transaction analysis model routine, simple business transactions in terms of the accounting equation: Assets = Liabilities + Shareholders' Equity. Topic: 02-19 Principles of Transaction Analysis

25. If a company has assets of $60,000 and shareholders' equity of $30,000, then its liabilities must be $90,000. FALSE

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-04 Apply the transaction analysis model routine, simple business transactions in terms of the accounting equation: Assets = Liabilities + Shareholders' Equity. Topic: 02-18 How Do Transactions Affect Accounts?

26. The recording of every transaction must include at least one debit and one credit. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 02-05 Determine the impact of business transactions on the statement of financial position by using two basic tools: journal entries and T-accounts. Topic: 02-25 Analytical Tools

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

27. A debit increases an account and a credit decreases an account. FALSE

28. A T-account shows total debits of $25,000 and total credits of $22,000; therefore, it has a $3,000 credit balance. FALSE

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-05 Determine the impact of business transactions on the statement of financial position by using two basic tools: journal entries and T-accounts. Topic: 02-25 Analytical Tools

29. In its simplest form, a T account consists of three parts: (1) its title, (2) a left or debit side and (3) a right or credit side. TRUE

30. For each transaction, the sum of debits may be different from the sum of credits. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 02-05 Determine the impact of business transactions on the statement of financial position by using two basic tools: journal entries and T-accounts. Topic: 02-25 Analytical Tools

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

31. A T-account is an accounting method of expressing the effects of a single transaction in a debits-equal-credits format. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 02-05 Determine the impact of business transactions on the statement of financial position by using two basic tools: journal entries and T-accounts. Topic: 02-25 Analytical Tools

32. Normally, asset accounts will have credit balances and liability accounts will have debit balances. FALSE

33. "Debit" is the designation for the left side of an account, and "credit" is the designation for the right side of an account. TRUE

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

34. Some legal contracts, such as the signing of a contract to hire a new employee, are not recorded in the accounting system. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-05 Determine the impact of business transactions on the statement of financial position by using two basic tools: journal entries and T-accounts. Topic: 02-25 Analytical Tools

35. Contributed capital results when a company buys a new delivery truck. FALSE

36. Retained earnings is increased by profits and decreased by losses and dividends. TRUE

37. When new shares are issued, the contributed capital account decreases. FALSE

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

38. Usually when a short-term, interest-bearing note payable is paid on its maturity date, an asset is credited and a liability is debited. TRUE

39. By themselves, journal entries do not provide the balances in accounts. TRUE

40. Calculating financial ratios can give clues to underlying conditions that may not be noticed by examining each financial statement item separately. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 02-06 Prepare a trial balance and a classified statement of financial position, and analyze the company using the current ratio. Topic: 02-29 How is the Statement of Financial Position Prepared and Analyzed?

41. The current ratio takes into account the composition of current assets. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-06 Prepare a trial balance and a classified statement of financial position, and analyze the company using the current ratio. Topic: 02-29 How is the Statement of Financial Position Prepared and Analyzed?

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

42. The sale of land for cash would be classified as a cash inflow from an investing activity. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 02-07 Identify investing and financing transactions, and demonstrate how they are reported on the statement of cash flows. Topic: 02-32 Some Misconceptions

43. The activity from the balance sheet to be presented in the financing activities section of the cash flow statement is based on an analysis of shareholders' equity only. FALSE

Multiple Choice Questions 44. The continuity assumption is inappropriate when A. the business is just starting up. B. liquidation appears likely. C. fair values are higher than costs. D. the business is organized as a proprietorship.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

45. Shareholders' equity A. is equal to liabilities and retained earnings. B. includes retained earnings and contributed capital. C. is shown on the income statement. D. is usually equal to cash on hand.

46. It is assumed that the activities of Petro Canada Corporation can be distinguished from those of Imperial Oil Limited because of the A. continuity assumption. B. separate-entity assumption. C. unit-of-measure assumption. D. periodicity assumption.

47. Abe Cox is the sole owner and manager of Cox Auto Repair Shop. In 20X1, Cox purchased a new automobile for personal use and continued to use an old truck in the business. Which of the following fundamentals prevents Cox from recording the cost of the new automobile as an asset to the business? A. Separate-entity assumption B. Revenue principle C. Full disclosure D. Historical cost principle

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 02-01 Define the objective of financial reporting, the qualitative characteristics of accounting information, and the related key accounting assumptions and principles. Topic: 02-02 Concepts Emphasized in Chapter 2

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

48. The main objective of financial reporting is to: A. compare a company's performance with its competitors. B. meet the needs of all potential users. C. provide information that is useful to individuals making investment and credit decisions. D. provide information that will be used by a company's managers for product pricing decisions.

49. Which one of the following is not a qualitative characteristic of useful accounting information? A. Relevance B. Faithful representation C. Materiality D. Comparability

50. The adoption of International Financial Reporting Standards can be viewed as an application of which of the following quality enhancing characteristics? A. Timeliness B. Representational faithfulness C. Verifiability D. Comparability

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

51. The dominating criteria by which accounting information can be judged is that of A. freedom from bias. B. comparability. C. timeliness. D. usefulness for decision making.

52. The assumption that a business enterprise will not be liquidated or sold in the near future is known as the A. monetary unit assumption. B. economic entity assumption. C. going concern assumption. D. conservatism assumption.

53. Accounting information is considered to be relevant when it A. can be depended on to represent the economic conditions and events that it is intended to represent. B. is capable of making a difference in a decision. C. is understandable by reasonably informed users of accounting information. D. is verifiable and neutral.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

54. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which accounting concept? A. Periodicity B. Cost/benefit relationship C. Comparability D. Monetary unit assumption

55. If Merry maid Company earned $1,000 from Sparkly Dental Group, and is not yet paid for the services where would Merry maid reflect this? A. Income statement only. B. Income statement and statement of financial position C. Statement of cash flows only. D. Statement of financial position only.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 02-02 Define the elements of a classified statement of financial position and analyze how the information is relevant to investors and other decision makers. Topic: 02-14 Elements of the Classified Statement Financial Position

56. Which of the following defines assets? A. Probable future economic benefits owned by an entity as a result of past transactions. B. Possible future economic benefits owed by an entity as a result of past transactions. C. Probable future economic benefits owned by an entity as a result of future transactions. D. Possible future economic benefits owed by an entity as a result of future transactions.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 02-02 Define the elements of a classified statement of financial position and analyze how the information is relevant to investors and other decision makers. Topic: 02-14 Elements of the Classified Statement Financial Position

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

57. Which of the following defines liabilities? A. Possible debts or obligations of an entity as a result of future transactions which will be paid with assets or services. B. Possible debts or obligations of an entity as a result of past transactions which will be paid with assets or services. C. Probable debts or obligations of an entity as a result of future transactions which will be paid with assets or services. D. Probable debts or obligations of an entity as a result of past transactions which will be paid with assets or services.

58. Which of the following defines shareholders' equity? A. Probable debts or obligations of an entity as a result of past transactions which will be paid with assets or services. B. Assets plus liabilities. C. Probable future economic benefits owned by an entity as a result of past transactions. D. The financing provided by the owners and the operations of a business.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

59. Liabilities are generally classified on a statement of financial position as A. small liabilities and large liabilities. B. present liabilities and future liabilities. C. tangible liabilities and intangible liabilities. D. current liabilities and non-current liabilities.

60. The asset that results when a customer buys goods or services on credit is A. notes receivable. B. accounts payable. C. cash. D. accounts receivable.

61. The asset that results from the payment of expenses in advance is A. short term investments. B. prepaid expenses. C. accounts receivable. D. inventory.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

62. Where would changes in shareholders' equity caused by operating activities be reported? A. In the retained earnings account. B. In a contributed capital account. C. In a liability account. D. In an asset account.

63. How are goods purchased for resale recorded in the financial statements? A. As prepaid expenses B. As cost of goods sold C. As inventory D. As operating expenses

64. On a classified balance sheet, prepaid expenses are classified as A. a current liability. B. property, plant, and equipment. C. a current asset. D. a long-term investment.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

65. Which of the following is not considered an asset? A. Equipment B. Dividend C. Patent D. Inventory

66. Which of the following liability accounts is usually not satisfied by payment of cash? A. Trade payables. B. Unearned revenues. C. Taxes payable. D. Short-term borrowings.

67. Accounting systems should record A. all economic events. B. events that result in a change in assets, liabilities, or shareholders' equity items. C. only events that involve cash. D. items of interest to the shareholders.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 02-03 Identify what constitutes a business transaction, and recognize common account titles used in business. Topic: 02-17 Accounts

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

68. Which of the following is least likely to have a liability called Deferred Revenue? A. An insurance company B. A retailer C. A magazine subscription company D. A university or college

69. When a new business is just starting up, which of the following must be done first? A. Generate positive cash flow through successful operations. B. Acquire the assets both long-lived and short-lived so they can operate. C. Acquire financing from issuance of shares and borrowing from creditors. D. These activities all occur simultaneously not sequentially.

70. An account is a part of the financial information system and is described by all except which one of the following? A. An account has a debit and credit side B. An account consists of three parts C. An account has a title D. An account is a source document

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

71. If total liabilities decreased by $14,000, and shareholders' equity increased by $6,000 during the same period, then the amount and direction (increase or decrease) of the period's change in total assets is a(n) A. $20,000 increase. B. $8,000 decrease. C. $8,000 increase. D. $14,000 increase.

72. Collection of a $1600 accounts receivable A. increases an asset by $1600; decreases a liability by $1600. B. decreases a liability by $1600; increases shareholders' equity by $1600. C. decreases an asset by $1600; decreases a liability by $1600. D. has no effect on total assets.

73. The purchase of an asset on credit A. increases assets and shareholders' equity. B. increases assets and liabilities. C. decreases assets and increases liabilities. D. has no effect on total assets.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

74. Assume a company's January 1, 20X1, financial position was: Assets, $40,000 and Liabilities, $15,000. During January 20X1, the company completed the following transactions: (a) paid on a note payable, $4,000 (no interest); (b) collected trade receivables, $4,000; (c) paid trade payables, $2,000; and (d) purchased a truck, $1,000 cash, and $8,000 notes payable. What is the company's January 31, 20X1 financial position?

A) B) C) D)

Assets $42,000 $44,000 $43,000 $42,000

Liabilities $9,000 $17,000 $18,000 $17,000

Shareholders' Equity $33,000 $27,000 $25,000 $25,000

A. Choice A B. Choice B C. Choice C D. Choice D Calculation: $40,000 - $4,000 + $4,000 - $4,000 - $2,000 - $1,000 + $9,000 = $42,000; $15,000 - $4,000 - $2,000 + $8,000 = $17,000; $42,000 - $17,000 = $25,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 02-04 Apply the transaction analysis model routine, simple business transactions in terms of the accounting equation: Assets = Liabilities + Shareholders' Equity. Topic: 02-18 How Do Transactions Affect Accounts?

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

75. Winsome Inc. reports total assets and total liabilities of $225,000 and $100,000, respectively, at the end of its first year of business. The company earned $75,000 during the first year and distributed $30,000 in dividends. What was the corporation's contributed capital? A. $125,000 B. $95,000 C. $80,000 D. $50,000 Calculation: $225,000 - $100,000 = $125,000 $125,000 - ($75,000 - $30,000) = $80,000.

76. Which one of the following represents the expanded basic accounting equation? A. Assets = Liabilities + Contributed capital + Retained Earnings + Revenues - Expenses Dividends B. Assets + Liabilities = Dividends + Expenses + Contributed capital + Revenues C. Assets - Liabilities - Dividends = Contributed capital + Revenues - Expenses D. Assets = Revenues + Expenses - Liabilities

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

77. The collection of a trade receivable from a customer would do which of the following? A. Increase liabilities. B. Decrease liabilities. C. Not affect liabilities. D. Decrease shareholders' equity.

78. The following amounts are reported in the ledger of Pete's Company:

Assets Liabilities Retained earnings

$25,000 (debit) 15,000 (credit) 5,000 (credit)

What is the balance in the contributed capital account? A. $5,000 credit. B. $5,000 debit. C. $12,000 credit. D. $12,000 debit. Calculation: $25,000 - $15,000 - $5,000 = $5,000.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

79. The purchase of an asset on credit A. increases assets and shareholders' equity. B. increases assets and liabilities. C. decreases assets and increases liabilities. D. has no effect on total assets.

80. Which of the following will not result in recording a transaction? A. Payment for cleaning services performed B. Hiring of a full-time employee C. Selling shares to investors. D. Buying equipment and agreeing to pay a note payable and interest at the end of a year.

81. Which of the following transactions will cause both the left and right side of the equation to increase? A. We collect cash from a customer who owed us money B. We pay a supplier for inventory we previously bought on account C. We borrow money from the bank D. We purchase equipment for cash

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

82. When a company buys equipment for $60,000 and pays for one third in cash and the other two thirds is financed by a note payable, which of the following are the effects on the accounting equation? A. Cash decreases by $60,000. B. Equipment increases by $20,000. C. Liabilities increase by $40,000. D. Total assets increase by $60,000.

83. The payment of a liability A. decreases assets and shareholders' equity. B. increases assets and decreases liabilities. C. decreases assets and increases liabilities. D. decreases assets and liabilities.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

84. If total liabilities increased by $25,000 and shareholders' equity increased by $5,000 during a given period of time, then the total assets during that period must have registered a A. $20,000 decrease. B. $25,000 increase. C. $30,000 increase. D. $20,000 increase. Calculation: + $30,000 = + $25,000 + $5,000.

85. A new company signed a lease for office space during their first month of business. At that time, they paid a total of $16,000 for first and second months' rent. At the end of the first month of operations, the financial statements would show: A. $16,000 rent expense B. $8,000 rent expense and $8,000 prepaid rent C. $16,000 prepaid rent D. $8000 prepaid rent

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

86. Which of the following statements is true? A. The normal balance is always on the side of the T account that is decreasing. B. The normal balance is always on the side of the T account that is increasing. C. The normal balance is always on the debit side of the T account. D. The normal balance is always on the credit side of the T account.

87. The classification and normal balance of the dividend account is A. revenue with a credit balance. B. an expense with a debit balance. C. a liability with a credit balance. D. shareholders' equity with a debit balance.

88. The term "credit" indicates the A. left side of an account. B. increase side of an account. C. right side of an account. D. decrease side of an account.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

89. In the first month of operations, the total of the debit entries to the cash account amounted to $1,900 and the total of the credit entries to the cash account amounted to $1,500. The cash account has a A. $500 credit balance. B. $900 debit balance. C. $400 debit balance. D. $400 credit balance.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-05 Determine the impact of business transactions on the statement of financial position by using two basic tools: journal entries and T-accounts. Topic: 02-23 How Do Companies Keep Track of Account Balances?

90. A debit increases all of the following accounts except for A. Cash B. Revenue C. Prepaid expense D. Salary expense

91. To record a transaction, an accountant debits an account $500, debits another account $1,000 and credits a third account $200. Which of the following could complete the recording of this transaction? A. Debiting a fourth account $1,300 B. Crediting a fourth account $1,300 C. Crediting a fourth account $1,500 D. Debiting a fourth account $1,500.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

92. Borrowing $100,000 of cash from First National Bank, signing a note to be paid, would do which of the following? A. Increase cash by a credit. B. Increase notes payable by a debit. C. Increase notes payable by a credit. D. Decrease cash by a debit.

93. Jet Corporation was organized on March 1, 20X2. Jet Corporation issued shares to each of the six owners who paid in a total of $3,000 cash. On the basis of transaction analysis, the following entry should be recorded in the accounts (dr = debit and cr = credit) A. Cash (dr), $3,000; Revenue (cr), $3,000. B. Cash (cr), $3,000; Shareholders' equity (dr), $3,000. C. Cash (dr), $3,000; Contributed capital (cr), $3,000. D. Cash (cr), $3,000; Contributed capital (dr), $3,000.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

94. UCC Company repaid a note payable of $20,000 (interest had previously been paid). This transaction should be recorded as follows on the payment date.

A) B) C) D)

Accounts payable Cash Cash Note payable Note payable Cash Note payable expense Cash

20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000

A. Choice A B. Choice B C. Choice C D. Choice D

95. A T account is A. a way of depicting the basic form of an account. B. a special account used instead of a journal. C. a special account used instead of a trial balance. D. is the actual account form used in real accounting systems.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

96. An accountant has debited an asset account for $500 and credited a revenue account for $1,000. What can be done to complete the recording of the transaction? A. Nothing further must be done. B. Debit a shareholders' equity account for $500. C. Debit another asset account for $500. D. Credit a different asset account for $500.

97. The trade payables account has a beginning balance of $1,000 and we purchased $3,000 of inventory on credit during the month. The ending balance was $800. How much did we pay our creditors during the month? A. $2,800 B. $3,000 C. $3,200 D. $4,800 Calculation: $1,000 + $3,000 - $800 = $3,200.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

98. When recording transactions in T-account format, we must add an additional step to the transaction analysis process. Which of the following is the additional step? A. Determine what accounts and elements in the equation are affected by the transaction. B. Determine if the affected accounts are increased or decreased by the transaction. C. We must have equal debits and credits once the entry is recorded in the accounts. D. The accounting equation must remain in balance after each transaction.

99. Assets normally show A. credit balances. B. debit balances. C. debit and credit balances. D. debit or credit balances.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

Cash Accounts receivable Inventory Prepaid insurance

KOOL BILLIARDS LTD. Statement of Financial Position December 31, 20X6 $60,000 Accounts payable 50,000 Salaries payable 70,000 Mortgage payable 40,000

Land

$70,000 10,000 90,000 $170,000

190,000

Building

100,000

Common shares

140,000

Less accumulated amortization

(20,000)

Retained earnings

250,000

Trademark net of amortization

Total assets

80,000 Total shareholders' equity 70,000

$560,000

$390,000 Total liabilities and shareholders' equity

100. The total dollar amount of assets to be classified as current assets is: A. $270,000 B. $220,000 C. $190,000 D. $170,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-06 Prepare a trial balance and a classified statement of financial position, and analyze the company using the current ratio. Topic: 02-29 How is the Statement of Financial Position Prepared and Analyzed? Topic: 02-30 Classified Statement of Financial Position

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$560,000

Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

101. The total dollar amount of assets to be classified as investments is: A. $0 B. $150,000 C. $100,000 D. $180,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-06 Prepare a trial balance and a classified statement of financial position, and analyze the company using the current ratio. Topic: 02-29 How is the Statement of Financial Position Prepared and Analyzed? Topic: 02-30 Classified Statement of Financial Position

102. Long-term liabilities total: A. $90,000 B. $170,000 C. $390,000 D. $560,000

103. The total dollar amount of assets to be classified as property, plant, and equipment is: A. $80,000 B. $340,000 C. $270,000 D. $190,000

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

104. The total amount of working capital is: A. $140,000 B. $370,000 C. $40,000 D. $60,000

105. The current ratio is: A. 1.75 to 1 B. 1.50 to 1 C. 3.25 to 1 D. 2.75 to 1

106. Earnings retained for use in the business are: A. $80,000 B. $390,000 C. $250,000 D. $60,000

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

107. A weakness of the current ratio is: A. the difficulty of the calculation. B. that it doesn't take the composition of the current assets into account. C. that it is rarely used by sophisticated analysts. D. that it can be expressed as a percentage, as a rate, or as a proportion.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 02-06 Prepare a trial balance and a classified statement of financial position, and analyze the company using the current ratio. Topic: 02-30 Classified Statement of Financial Position

108. Issuance of common shares for cash is an example of what kind of activity? A. Financing activity B. Investing activity C. Operating activity D. Extraordinary activity

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 02-07 Identify investing and financing transactions, and demonstrate how they are reported on the statement of cash flows. Topic: 02-32 Some Misconceptions

109. Which of the following would be an example of a financing transaction? A. Purchasing equipment for cash. B. Buying inventory from a supplier on credit. C. Selling shares to investors for cash. D. Buying inventory from a supplier for cash.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 02-07 Identify investing and financing transactions, and demonstrate how they are reported on the statement of cash flows. Topic: 02-32 Some Misconceptions

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

110. Investing activities include A. collecting the principal on loans made. B. obtaining cash from creditors. C. obtaining capital from owners. D. repaying money previously borrowed.

111. Which of the following would cause an inflow of cash? A. Payment of a long-term mortgage. B. Sale of an asset for cash at less than its book value. C. Payment of accounts payable. D. Purchase of inventory for debt.

112. Dow Construction Company reports a net use of cash for investing activities of $1.2 million and a net source of cash provided by financing of $.8 million. What was the effect on the cash balance? A. To cause the balance to increase by $.8 million. B. To cause the balance to decrease by $.4 million. C. To cause the balance to increase by $.4 million. D. Undeterminable because the beginning cash balance was not given. Calculation: $.8 million - $1.2 million = ($0.4 million).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 02-07 Identify investing and financing transactions, and demonstrate how they are reported on the statement of cash flows. Topic: 02-32 Some Misconceptions

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

113. Which of the following expenses has no effect on the cash flow of a firm? A. Salaries expense B. Interest expense C. Depreciation expense D. Cost of goods sold

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

Short Answer Questions 114. Match the terminology with the description by entering the proper letter in the space to the left. A. Credits B. Share Capital C. Cost principle D. Transaction E. Debits F. Liability G. Statement of financial position H. Primary objective of external financial reporting I. Separate-entity assumption J. Retained earnings K. As at December 31, 20X1 L. For the period ended December 31, 20X1 M. None of the above is correct ____ 1. Increase assets and decreases shareholders' equity. ____ 2. An exchange between an entity and another party. ____ 3. Normal balances for liabilities. ____ 4. To provide useful economic information about a business to help external parties make sound financial decisions. ____ 5. Accounting assumption that requires assets to be recorded at their cash equivalent cost. ____ 6. Cumulative earnings that have not been distributed to the owners. ____ 7. A debt owed by the entity. ____ 8. Statement of financial position. ____ 9. Account for a business separate from its owners. ___ 10. Dating of the statement of financial position (20X1). 1. E; 2. D; 3. A; 4. H; 5. C; 6. J; 7. F; 8. G; 9. I; 10. K

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 02-01 Define the objective of financial reporting, the qualitative characteristics of accounting information, and the related key accounting assumptions and principles. Topic: 02-01 Overview of Accounting Concepts

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

115. Why is the continuity assumption so important for statement of financial position reporting? The continuity assumption is also known as the going-concern assumption. It is important for statement of financial position reporting because of valuation issues. If a business is expected to operate into the foreseeable future, amounts presented on the statement of financial position for assets and liabilities are based on the cost principle. If the continuity assumption is not followed, assets and liabilities might be reported at liquidation values as if they are going out of business.

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 02-01 Define the objective of financial reporting, the qualitative characteristics of accounting information, and the related key accounting assumptions and principles. Topic: 02-02 Concepts Emphasized in Chapter 2

116. Why is the separate-entity assumption so important for statement of financial position reporting? The separate-entity assumption is important for statement of financial position reporting because a business should present only its own assets and liabilities on the statement. A business is a separate accounting entity from its owners. Therefore, the owners' assets and liabilities would appear on their own (personal) financial statement. The mixing of the two would create meaningless financial statements.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

117. Why is the historical cost principle so important for statement of financial position reporting? The cost principle is important for statement of financial position reporting because of valuation issues. The cash-equivalent cost is verifiable. If it were not for the cost principle, assets and liabilities could be reported at more subjective values. This could lead to manipulation of statement of financial position amounts.

118. Classify the following statement of financial position accounts for Canada Goose Linen Co.

_____ _____ _____ _____ _____ _____ _____ _____ _____ _____

a. Investments in associates b. Retained Earnings c. Notes Payable due in 6 months d. Land e. Short-term investments f. Bonds Payable g. Supplies h. Share Capital i. Bank loan due in 5 years j. Income Taxes Payable

(a) NCA, (b) SE, (c) CL, (d) NCA, (e) CA, (f) NCL, (g) CA, (h) SE, (i) NCL, (j) CL

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 02-02 Define the elements of a classified statement of financial position and analyze how the information is relevant to investors and other decision makers. Topic: 02-14 Elements of the Classified Statement Financial Position

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

119. For each of the following events, which ones result in an exchange transaction for the O'Brien Company? Place Y for yes and N for no beside each item.

_____ _____ _____ _____ _____ _____

a. Purchased land for cash and a note payable b. Agreed to purchase one million inventory parts from a new supplier c. Paid the employees for the week d. One of our shareholders sells her shares to a new investor e. Received inventory from a supplier under the new contract f. Entered into a contract with a new cleaning service

(a) Y, (b) N, (c) Y, (d) N, (e) Y, (f) N

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 02-03 Identify what constitutes a business transaction, and recognize common account titles used in business. Topic: 02-16 Nature of Business Transactions

120. For each item below, indicate whether the account will be debited or credited: 1. Decrease in Accounts Payable 2. Increase in Dividends 3. Increase in Common Shares 4. Increase in Unearned Revenue 5. Decrease in Interest Payable 6. Increase in Prepaid Insurance 7. Decrease in Wages Expense 8. Decrease in Supplies 9. Increase in Revenues 10. Decrease in Accounts Receivable Please review the following information:

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

1. Decrease in Accounts Payable 2. Increase in Dividends 3. Increase in Common Shares 4. Increase in Unearned Revenue 5. Decrease in Interest Payable 6. Increase in Prepaid Insurance 7. Decrease in Wages Expense 8. Decrease in Supplies 9. Increase in Revenues 10. Decrease in Accounts Receivable

Dr. Dr. Cr. Cr. Dr. Dr. Cr. Cr. Cr. Cr.

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 02-04 Apply the transaction analysis model routine, simple business transactions in terms of the accounting equation: Assets = Liabilities + Shareholders' Equity. Topic: 02-18 How Do Transactions Affect Accounts?

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

121. Analyze the transactions of the business organized as a corporation described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (-) to indicate a decrease.

Assets 1. Received cash for services provided. 2. Purchased office equipment on credit. 3. Paid employees' salaries. 4. Received cash from customer in payment on account. 5. Paid telephone bill for the month. 6. Paid for office equipment purchased in transaction 2. 7. Purchased office supplies on credit. 8. Dividends were paid. 9. Obtained a loan from the bank. 10. Billed customers for services performed.

Please review the following information:

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= Liabilities

+ Shareholders' Equity

Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

= Liabilities

+ +

+ Shareholders' Equity +

+, -

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

122. For each financial statement element listed, enter check marks to reflect the Debit = Credit concept.

Element

Debit Increase

A B C D

Credit

Decrease

Increase

Decrease

Assets Liabilities Share Capital Retained Earnings

Please review the following information:

Element

A B C D

Assets Liabilities Share Capital Retained Earnings

Debit Increase X

Credit Decrease

Increase

X X x

X X X

Decrease X

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

123. For each of the accounts listed below, enter a check mark in the space provided to the right to indicate whether the typical or normal balance is a debit or credit.

Transaction

Typical Balance Debit

A B C D E F G H I

Credit

Supplies Salaries payable Retained earnings Equipment Prepaid insurance Trade receivables Salaries expense Share capital Trade payables

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

Please review the following information:

Transaction

A B C D E F G H I

Supplies Salaries payable Retained earnings Equipment Prepaid insurance Trade receivables Salaries expense Share capital Trade payables

Typical Balance Debit X

Credit X X

X X X X X X

124. Explain why the general journal does not allow you to immediately see the balance in a particular account. Transactions are recorded in the journal in chronological order so you can revisit each transaction and the accounts affected by that transaction. It is the ledger which tracks the increases and decreases of each individual account. The ledger shows the aggregate effect of all recorded transactions on each account.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

125. In what two places do amounts for transactions appear in the accounting system or "the books"? Describe them. Transactions are first recorded in the journal. This is known as the book of original entry. Transactions are entered chronologically in a debit-credit format. After transactions are journalized, the amounts are posted to the ledger (the book of final entry). The ledger contains accounts for each financial statement element so that balances can be determined.

126. The accounts with identification letters for Wild World Inc. are listed below. Letter Account Title A. Cash. B. Trade Receivables. C. Office supplies. D. Equipment. E. Land. F. Trade Payables. G. Notes Payable. H. Share Capital. I. Retained Earnings. During 20X9, the company completed the transactions given below. You are to indicate the appropriate journal entry for each transaction by giving the account letter and amount. Some entries may need three letters. The first transaction is given as an example.

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

Transaction

Debit Letter

Ex. 1 2 3 4 5 6 7

Owners invested $30,000 cash for shares. Borrowed $50,000 and signed a note. Purchased equipment for $30,000. Paid $10,000 in cash, signed a $20,000 note payable. Collected $16,000 trade receivables. Paid $8,000 of trade payables. Acquired a $40,000 piece of land by issuing capital shares. Purchased $2,000 of office supplies (an asset) on credit. Paid for the office supplies in (6).

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Credit Amount $30,000

Letter H

Amount $30,000

Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

Please review the following information:

Transaction

Debit Letter

3 4 5

Borrowed $50,000 and signed a note. Purchased equipment for $30,000. Paid $10,000 in cash, signed a $20,000 note payable. Collected $16,000 trade receivables. Paid $8,000 of trade payables. Acquired a $40,000 piece of land by issuing capital shares. Purchased $2,000 of office supplies (an asset) on credit. Paid for the office supplies in (6).

Credit Amount Letter 50,000 G

Amount 50,000

30,000 A G

10,000 20,000

16,000 B

16,000

8,000 A

8,000

40,000 H

40,000

2,000 F

2,000

2,000 A

2,000

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

127. Analyze the effect of the following transactions using the basic accounting equation and the format provided below. i. Bought land with an estimated fair value of $150,000 by issuing 100,000 shares. ii. Issued 10,000 common shares for $15,000 cash. iii. Purchased a 2-year insurance policy for $4,800. iv. Paid rent of $3,000. v. Bought equipment for $50,000. Paid 20% down in cash and the balance on a 5-year, 6% note payable. vi. Purchased $9,000 of merchandise inventory on credit. vii. Paid utilities bill for $750. viii. Sold $8,000 of merchandise inventory for $16,000 cash. ix. Paid $2,500 on merchandise inventory previously purchased. x. Declared a $1,000 dividend. xi. Recognized that 1 month of the insurance coverage had expired. FORMAT: ASSETS = Transactio Cash n

LIABILITIES+

A/R Inventory Prepaid Land expense

SHAREHOLDERS’ EQUITY Equipmen A/P Dividend Long- Common Retained t Payable term shares Earnings debt

Example 150,000

Account totals TOTALS

150,000

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

Please review the following information:

ASSETS = Transactio Cash n

LIABILITIES +

A/R Inventor Prepaid y expens e

Land

Equipme nt

A/P

+150,00 0 +15,000 -4,800

SHAREHOLDERS’ EQUITY Dividen Long- Commo Retaine d term n shares d Payable debt Earning s +150,00 0 +15,000

+4,800

-3,000

-10,000

+50,000 +9,000

+40,000 +9,000

-750

+16,000

-8,000

+8,000

-2,500

-2,500 +1,000 -200

Account totals TOTALS

+9,950

-1,000 -200

+1,000 +4,600 +150,00 +50,000 +6,500 0 = $215,550

+1,000 +40,000 +165,00 +3,050 0 = $215,550

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 02-05 Determine the impact of business transactions on the statement of financial position by using two basic tools: journal entries and T-accounts. Topic: 02-23 How Do Companies Keep Track of Account Balances? Topic: 02-24 The Direction of Transaction Effects

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

128. (A) Complete the following schedule for Sweet Baby Company.

Transaction Beginning financial position Borrowed $20,000 cash using a note payable, face amount $20,000 Collected trade receivables for cash, $5,000 Paid trade payables, $1,000 cash Purchased office supplies on credit, $1,000 Sold shares to new investors for $5,000 of cash Paid a $10,000 note payable Ending financial position

Assets $75,000

Liabilities $25,000

Shareholders' Equity $50,000

Assets $75,000 +20,000 +5,000

Liabilities $25,000 +20,000

Shareholders' Equity $50,000

-1,000 +1,000 +5,000 -10,000 $90,000

-1,000 +1,000

(B) How much did cash change during the period? (A) Transaction Beginning financial position Borrowed $20,000 cash using a note payable, face amount $20,000 Collected trade receivables for cash, $5,000 -5,000 Paid trade payables, $1,000 cash Purchased office supplies on credit, $1,000 Sold shares to new investors for $5,000 of cash Paid a $10,000 note payable Ending financial position

+5,000 -10,000 $35,000

(B) Cash increase, $19,000 (+20,000 +5,000 -1,000 +5,000 -10,000)

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$55,000

Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

129. Scott, Kim and Koko organized the SKK Corporation on January 1 20X1. Each of these owners invested $30,000 cash and received shares. Below are selected transactions that were completed during January. (A) Give the entry on SKK's books for each transaction: (1) Sold shares to the owners. (2) Borrowed $100,000 on one-year note payable. (3) Purchased land by signing a $20,000 note payable. (4) Paid $5,000 of trade payables. (5) Purchased two service vehicles, $21,000 each; paid cash. (6) Accepted a promissory note of $1,000 from a customer. (B) Complete the following based only on the 6 transactions above: Assets $ Liabilities $ Shareholders' equity $ (A) 1.

Cash(30,000 ´ 3) (A) Share capital (SE) Investment by owners Cash (A) Note payable (L) Borrowed $100,000 on a one-year note. Land (A) Note payable (L) Purchased land by signing a $20,000 note payable. Trade payables (L) Cash (A) Paid $5,000 of trade payables. Equipment (A) Cash (A) Purchased two service vehicles, $21,000 each (paid cash) Notes receivable (A) Cash (A) Accepted a $1,000 promissory note from a customer.

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90,000 90,000 100,000 100,000 20,000 20,000 5,000 5,000 42,000 42,000 1,000 1,000

Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

(B) Assets Liabilities Shareholders' equity

$205,000 $115,000 $90,000

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

130. On January 1, 20X1, Cliff Constable started a new professional corporation, Cliff Constable, LLC., to practice medicine with an initial investment of $50,000. On June 30, 20X1 the accounting records contained the following amounts:

Trade Payables Trade Receivables Cash Share Capital Office Equipment Office Supplies Retained Earnings

$100 3,900 25,100 50,000 24,000 500 3,400

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

Prepare a statement of financial position at June 30, 20X1. Cliff Constable, LLC. Statement of Financial Position As of June 30, 20X1

Assets Cash Trade receivables Office supplies Total assets

$25,100 3,900 500 24,000 $53,500

Liabilities Trade payables

$100

Shareholders' Equity Share capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

$50,000 3,400 53,400 $53,500

Accessibility: Keyboard Navigation Blooms: Create Difficulty: Medium Learning Objective: 02-06 Prepare a trial balance and a classified statement of financial position, and analyze the company using the current ratio. Topic: 02-30 Classified Statement of Financial Position

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Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

131. For each of the transactions listed below, indicate whether it is an investing (I) or financing (F) activity on the cash flow statement. Also, indicate if the transaction increases (+) or decreases (-) cash.

Type of Activity

Transaction Ex. A B C D E F

Paid dividends to the owners Purchased equipment to use in the business. Issued shares for cash. Borrowed money at the bank. Sold a piece of land adjacent to the plant. Paid the principal balance of a note payable. Sold old machinery used in the business

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Effec t on Cash -

Chapter 02 - Investing and Financing Decisions and the Statement of Financial Position

Please review the following information:

Type of Activity

Transaction A B C D E F

Purchased equipment to use in the business. Issued shares for cash. Borrowed money at the bank. Sold a piece of land adjacent to the plant. Paid the principal balance of a note payable. Sold old machinery used in the business

I F F I F I

Effect on Cash + + + +

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 02-07 Identify investing and financing transactions, and demonstrate how they are reported on the statement of cash flows. Topic: 02-32 Some Misconceptions

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Chapter 03 - Operating Decisions and the Statement of Earnings

Chapter 03 Operating Decisions and the Statement of Earnings

True / False Questions 1. The operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell them to customers, and collect the cash from the customers. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

2. According to the periodicity assumption, to measure and report financial information periodically, we assume the long life of the company can be cut into shorter periods. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

3. The operating cycle is of a similar duration for most companies. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

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Chapter 03 - Operating Decisions and the Statement of Earnings

4. The division of business activities into a series of equal periods for accounting purposes is known as the periodicity assumption. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

5. The statement of earnings provides investors with information about a company's investing activities. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-02 The Operating Cycle

6. A Taco Bell restaurant would most likely have a longer operating cycle than Walmart. FALSE

7. When a growing company finds it needs to buy more inventory before cash has been collected from customers, they often use short term credit such as trade or notes payable to finance the inventory purchases. TRUE

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Chapter 03 - Operating Decisions and the Statement of Earnings

8. Revenues are decreases in assets or settlements of liabilities from ongoing operations. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-03 Classified Statement of Earnings

9. The profit of a business is computed by subtracting revenues from expenses. FALSE

10. Losses are decreases in assets or increases in liabilities from peripheral activities. TRUE

11. Income tax expense will appear on the statement of financial position. FALSE

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Chapter 03 - Operating Decisions and the Statement of Earnings

12. Operating revenues result from the sale of goods or services. TRUE

13. A gain on sale of land causes an increase in income as a result of operating activities. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-05 Prepare a classified statement of earnings and explain the difference between net earnings and cash flow operations. Topic: 03-03 Classified Statement of Earnings

14. Investors are most interested in income from operations as it best predicts future company performance. TRUE

15. Cost of goods sold is usually the largest expense for manufacturing or merchandising companies. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-05 Prepare a classified statement of earnings and explain the difference between net earnings and cash flow operations. Topic: 03-03 Classified Statement of Earnings

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Chapter 03 - Operating Decisions and the Statement of Earnings

16. Accrual basis accounting records revenues when earned and expenses when incurred, regardless of when the related cash is received or paid. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

17. The concept of accruals largely forms the basis for the accounting profession. TRUE

18. The cash flow of a transaction can occur before, at the same time as, or after the transaction itself. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

19. Prepaid expenses will eventually be expensed as they are used by the business. TRUE

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Chapter 03 - Operating Decisions and the Statement of Earnings

20. Unearned revenue is an asset. FALSE

21. Using the accrual basis of accounting, a company recognizes expenses when they are paid. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

22. The revenue principle recognizes revenues when the earnings process is complete or nearly complete, an exchange has taken place, and collection is probable. TRUE

23. Cash basis accounting is often adequate for very small businesses such as a small retail store or a doctor's office. TRUE

3-6

Chapter 03 - Operating Decisions and the Statement of Earnings

24. Accrual basis accounting recognizes revenues when cash is received from the customer. FALSE

25. Expenses incurred, but not yet paid, create a receivable (i.e., an asset) until payment occurs. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

26. Accrued in the case of expenses means paid in advance, and deferred in the case of expenses means not yet paid. FALSE

27. Deferred revenues refer to monies collected in advance of being earned and accrued revenues means earned but not yet collected. TRUE

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Chapter 03 - Operating Decisions and the Statement of Earnings

28. Expenses are recognized when an exchange takes place of productive assets, the earnings process is complete or nearly complete, and collection is likely. FALSE

29. The matching process recognizes liabilities when incurred in earning revenue. FALSE

30. Transactions where cash is received before being earned often result in adjusting entries at the end of the period to record profit in the proper period. TRUE

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Chapter 03 - Operating Decisions and the Statement of Earnings

31. The revenue principle recognizes revenue from the sale of goods when ownership passes from the seller to the buyer. In the sale of services, revenue is recognized when the services are rendered. TRUE

32. The sale of merchandise on credit and the collection from the customer ten days later constitutes one transaction for accounting purposes. FALSE

33. Revenue recognition most commonly occurs at the point of delivery of goods or services to the customer. TRUE

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Chapter 03 - Operating Decisions and the Statement of Earnings

34. A company that ships product to its customers in January 20X2 but records them as revenue in December 20X1 has not violated the revenue principle because they were manufactured and ready for sale before the accounting year end. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-13 The Revenue Recognition Principle

35. We record insurance as an expense when we pay for a three-year policy. FALSE

36. Under the double-entry system, revenues must always equal expenses. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

37. Under the double-entry system, the sum of all debits must equal the sum of all credits for each and every transaction. TRUE

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Chapter 03 - Operating Decisions and the Statement of Earnings

38. An expense account is a subdivision of the retained earnings account and decreases shareholder's equity. FALSE

39. If a revenue account is credited, the revenue account is increased. TRUE

40. Debit and credit can be interpreted to mean "bad" and "good," respectively. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

41. A credit means that an account has been increased. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

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Chapter 03 - Operating Decisions and the Statement of Earnings

42. An increase in an asset is recorded by a debit. TRUE

43. A decrease in a liability account is recorded by a debit. TRUE

44. The double-entry accounting system records the dual effect of each transaction. TRUE

45. The normal balance of the Dividend account is a debit. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

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Chapter 03 - Operating Decisions and the Statement of Earnings

46. The normal balance of an asset is a credit. FALSE

47. The normal balance of all accounts is a debit. FALSE

48. Revenue accounts normally have debit balances because they represent assets received while expense accounts normally have credit balances because they represent assets used. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

49. The double-entry system of accounting refers to the placement of a double line at the end of a column of figures. FALSE

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Chapter 03 - Operating Decisions and the Statement of Earnings

50. Collection of a customer's account has an impact on total assets. FALSE

51. The statement of earnings reports profit or loss at a point in time. FALSE

52. A classic growth problem faced by small, fast growing firms is to be running out of cash while making a profit. TRUE

53. Companies that mainly provide services to generate revenue can expect salaries expense to be their largest cost. TRUE

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Chapter 03 - Operating Decisions and the Statement of Earnings

54. The premature recognition of revenue results in higher income this period but lower income in a future period. TRUE

55. The inclusion of an expense from last accounting period on this period's income statement results in the over reporting of income this period and underreporting of income last period. FALSE

56. A company can experience financial difficulty even if it does not report a loss. TRUE

57. Unadjusted financial statements do not reflect revenues earned or expenses incurred in the current accounting period if the receipt or payment of cash occurs in a different period. TRUE

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Chapter 03 - Operating Decisions and the Statement of Earnings

58. Profit differs from cash flow from operations because the revenue recognition and matching principle result in the recognition of revenues and related expenses that are independent of the timing of cash receipts and payments. TRUE

59. A high total asset turnover signifies efficient management of assets; a low asset turnover ratio signifies less efficient management. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-06 Compute and interpret the total asset turnover ratio and the return on assets. Topic: 03-19 Classified Statement of Earnings

60. Even in a well-run business, creditors expect the total asset turnover ratio to fluctuate due to seasonal upswings and downturns. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 03-05 Prepare a classified statement of earnings and explain the difference between net earnings and cash flow operations. Topic: 03-19 Classified Statement of Earnings

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Chapter 03 - Operating Decisions and the Statement of Earnings

Multiple Choice Questions 61. The periodicity assumption is the basis for which of the following? A. dividing the activities of a business into a series of time periods for accounting and reporting purposes. B. the cut-off of revenue recognition only. C. keeping the company's transactions separate from the owners' transactions. D. the cut-off of expense recognition only.

62. The operating cycle of a business is best defined as which of the following? A. the period of time for which we prepare our financial statements B. the length of time over which our plant and equipment assets are expected to be used by the company in generating revenues C. the time it takes for a company to purchase and pay for goods or services from suppliers, sell those goods or services to customers and collect cash from the customers D. one year

63. Which of the following businesses would most likely have the shortest operating cycle? A. A retail chain such as Walmart B. A jewelry manufacturer such as Mappins C. A grocery chain such as Loblaws D. A pizza franchise such as Pizza

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

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Chapter 03 - Operating Decisions and the Statement of Earnings

64. All of the following statements about the cash-to-cash cycle are true except: A. It includes normal buying/selling of goods to earn profit. B. It includes normal day to day operating activities, investing activities, and financing activities. C. typical business operations involve an outflow of cash followed by an inflow of cash. D. specific activities include purchasing inventory and selling product.

65. If total revenues are the same as total expenses, then a company has which of the following? A. a loss. B. a profit. C. neither a profit nor a loss. D. a decrease in shareholders' equity.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-03 Classified Statement of Earnings

66. Financial analysts look to the statement of earnings to determine which of the following? A. whether the company has generated profits from operations B. if the company has invested too much cash in its inventory C. whether the company has generated sufficient cash to pay its bills D. if the company is collecting its receivables on time

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Chapter 03 - Operating Decisions and the Statement of Earnings

67. Which of the following expenses is usually listed last on the statement of earnings? A. Advertising expense B. Cost of sales C. General administrative expenses D. Income tax expense

68. If a toy manufacturer sold a piece of equipment in the normal course of its operations, where would the related amount be reported on a multi-step income statement? A. In income from discontinued operations B. In non-operating income C. In income from asset dispositions D. In income from operations

69. If a heavy equipment manufacturer sold heavy equipment in the normal course of its operations, where would the related amount be reported on a multi-step income statement? A. In income from discontinued operations B. In non-operating income C. In income from asset dispositions D. In income from operations

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Chapter 03 - Operating Decisions and the Statement of Earnings

70. Which of the following amounts would be presented separately from the results of continuing operations in the income statement? A. The loss from writing down obsolete inventory B. A gain on the sale of land C. The loss incurred due to a flood D. The loss from a plant closure

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-03 Classified Statement of Earnings

71. Calculate the effective tax rate for a company that reports an income tax expense of $3.0 million, profit of $7.5 million, and income before taxes of $10.5 million. A. 28.6% B. 35% C. 40% D. It cannot be computed with the above information Calculation: $3.0 million/$10.5 million = 28.6%.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-03 Classified Statement of Earnings

72. Which of the following activities will most likely result in a reported loss on the statement of earnings? A. The sale of inventory to customers B. The sale of old equipment C. The wages and benefits paid to employees D. Interest expense

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Chapter 03 - Operating Decisions and the Statement of Earnings

73. Which of the following statements about accumulated depreciation is NOT true? A. It is consistent with the matching principle B. It records the portion or how much of the asset has been used up C. It is reflected on the balance sheet D. It helps determine the fair value of the asset

74. Accrued revenues are A. received and recorded as liabilities before they are earned. B. earned and recorded as liabilities before they are received. C. earned but not yet received or recorded. D. earned and already received and recorded.

75. The matching principle states that expenses should be matched with revenues because A. efforts should be matched with accomplishments. B. dividends should be matched with shareholder investments. C. cash payments should be matched with cash receipts. D. assets should be matched with liabilities.

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Chapter 03 - Operating Decisions and the Statement of Earnings

76. During 20X2, New Company earned service revenues amounting to $200,000, of which $120,000 were collected in cash; the balance will be collected in January 20X3. The 20X2 statement of earnings of the company should report which of the following amounts for service revenues? A. $80,000. B. $120,000. C. $200,000. D. $320,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-13 The Revenue Recognition Principle

77. At the end of December, the owner of an apartment complex realized that the December rent had not been collected from one of the tenants. December 31 was the end of the accounting year; therefore, the owner made the appropriate adjusting entry at that time. When the December rent was collected in January of the following year, the entry made by the apartment owner should include which of the following? A. debit to Rent receivable. B. credit to Rent receivable. C. debit to Rent revenue collected in advance. D. credit to Rent revenue.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-13 The Revenue Recognition Principle

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Chapter 03 - Operating Decisions and the Statement of Earnings

78. Under the accrual basis of accounting A. cash must be received before revenue is recognized. B. profit is calculated by matching cash outflows against cash inflows. C. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared. D. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.

79. A company purchased and received $3,500 worth of goods on credit to be sold in their stores. How would the event be recorded? A. Dr. Inventory $3,500, Cr. Expenses $2,500 B. Dr. Expenses $3,500, Cr. Accounts payable $2,500 C. Dr. Inventory $3,500, Cr. Accounts payable $3,500 D. the event would be disclosed in the notes to financial statements only

80. Which method of preparing income statements provides the most information about future cash flows? A. accrual basis B. cash basis C. historical basis D. actual basis

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Chapter 03 - Operating Decisions and the Statement of Earnings

81. Accrued expenses which must be recorded in adjusting entries represent which of the following? A. expenses incurred but not yet paid. B. expenses incurred but not yet recorded or paid. C. expenses paid in advance. D. expenses paid in advance and not recorded.

82. Revenue is always recognized when which of the following occurs? A. expenses are paid. B. cash is collected. C. it is earned. D. the end of the period arrives.

83. Which of the following is not an example of the application of the revenue principle? A. Recording the sale of merchandise on credit in sales revenue. B. Recording rent received in advance as rent revenue. C. Recording accrued interest revenue on a loan made to another party. D. Recording the sale of merchandise for cash in sales revenue.

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Chapter 03 - Operating Decisions and the Statement of Earnings

84. In applying the revenue principle to a given transaction, the most important moment or period in time is when which of the following happens? A. Related cash inflows occur. B. Related expenses are incurred. C. Sales transaction is completed (i.e., ownership passes) or services are rendered. D. The service contract is signed regarding service to be performed.

85. Which principle holds that all the expenses incurred in earning revenue should be identified with the revenue recognized and reported for the same period? A. Revenue principle. B. Matching principle. C. Timing principle. D. Liability principle.

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Chapter 03 - Operating Decisions and the Statement of Earnings

86. During the accounting period, Luxor Company had the following data: Sales of products: Cash received $70,000 On credit (not yet received) $10,000 Expenses: Cash paid $35,000 On credit (not yet paid) $3,000 What were the sales revenue and expenses?

A B C D

Sales Revenue $80,000 $70,000 $80,000 $80,000

Expenses $32,000 $35,000 $35,000 $38,000

A. Choice A B. Choice B C. Choice C D. Choice D Calculation: Sales = $70,000 + $10,000; Expenses = $35,000 + $3,000.

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Chapter 03 - Operating Decisions and the Statement of Earnings

87. Which of the following is not normally a condition that must be met for revenue to be recognized (recorded) under the revenue principle? A. The earnings process is complete or nearly complete. B. The promise to perform an exchange in the future has been made. C. Collection of receivables from credit sales is reasonably assured. D. The amount of revenue can be measured reliably.

88. Which of the following costs is most likely to be the largest expense item on the statement of earnings of a merchandising chain such as Walmart? A. Wage, salary and benefits expense B. Advertising C. Cost of Sales D. Income tax expense

89. Accrued expenses are A. paid and recorded in an asset account before they are used or consumed. B. paid and recorded in an asset account after they are used or consumed. C. incurred but not yet paid or recorded. D. incurred and already paid or recorded.

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Chapter 03 - Operating Decisions and the Statement of Earnings

90. Tony's Tune-Up Shop Ltd. follows the revenue recognition principle. Tony services a car on May 31. The customer picks up the vehicle on June 1 and mails the payment to Tony on June 5. Tony receives the cheque in the mail on June 6. When should Tony show that the revenue was earned? A. May 31 B. June 5 C. June 1 D. June 6

91. A company receives a $25,000 cash deposit from a customer on March 15 but will not deliver the goods until April 20. Which of the following statements is false? A. Cash will be reported on the statement of cash flows for the month of March. B. Revenue will be recorded and reported on the statement of earnings for April. C. A liability will be reported on the statement of financial position at the end of March. D. Revenue will be recorded and reported on the statement of earnings for March.

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Chapter 03 - Operating Decisions and the Statement of Earnings

92. Which of the following activities does not violate the revenue recognition principle? A. Recording revenue in December 2019 for units manufactured but not yet sold to customers. B. Recording cash received in advance from customers as revenue when the product is not yet shipped. C. Not recording interest earned in 2019 until the cash is received in 2020. D. Recording cash received in advance from customers as a liability when the product is not yet shipped.

93. Savannah Spa sells gift certificates for spa services. These gift certificate sales should be recorded as: A. a credit to unearned revenue B. a credit to sales revenue C. a debit to sales revenue D. a credit to cash

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Chapter 03 - Operating Decisions and the Statement of Earnings

94. Fairchild had the following information related to the sale of its products during its first year of business:

Revenue Returns of goods sold Cash collected Cost of goods sold

$1,000,000 $100,000 $800,000 $700,000

Under the accrual basis of accounting, how much net revenue would be reported on Fairchild's income statement? A. $200,000 B. $800,000 C. $900,000 D. $700,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-13 The Revenue Recognition Principle

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Chapter 03 - Operating Decisions and the Statement of Earnings

95. Cheeptravel.com sells flights for various airlines and destinations over the internet and receives a 25 percent commission for tickets sold. Cheeptravel collects the full amount from the customer and remits the net amount after commission to the airline. Unsold tickets are returned to the airline after 90 days. During 20X6, Cheeptravel had the following information: 1. Total sales price of tickets sold during 20X6 was $2,000,000. 2. Total commissions retained by Cheeptravel during 20X6 for these tickets was $500,000. 3. Total expenses incurred for web site maintenance for Cheeptravel was $1,000 per month. How much revenue should Cheeptravel report on its 20X6 income statement? A. $500,000 B. $2,000,000 C. $1,500,000 D. $488,000

96. Nettleton Technologies has a December 31 year-end. They provided services worth $40,000 in December and were paid $10,000 in cash at that time with the rest paid in January. The employees who performed the services were paid $25,000 for their work in January. Under the matching concept how much net income would be reported in December? A. ($15,000) B. $15,000 C. $10,000 D. $40,000

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Chapter 03 - Operating Decisions and the Statement of Earnings

97. Which of the following is an advantage of accrual accounting? A. It does not require the application of professional judgment B. It provides more relevant information C. It provides more timely information D. It records all economic events

98. What would be the effect on December's statement of earnings of a utility bill received on December 27, 2019 but which will not be paid until January 10, 2020? A. No expense will be recognized until the bill is paid in January. B. This would cause an increase in profit by recording the expense in December. C. Recording the expense in December when it is incurred will increase expenses. D. Profit will be decreased when we pay the bill in January.

99. Collection of a $600 accounts receivable A. increases an asset $600; decreases a liability $600. B. decreases a liability $600; increases shareholders' equity $600. C. decreases an asset $600; decreases a liability $600. D. has no effect on total assets.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

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Chapter 03 - Operating Decisions and the Statement of Earnings

100. The purchase of an asset for cash A. increases assets and shareholders' equity. B. increases assets and liabilities. C. decreases assets and increases liabilities. D. leaves total assets unchanged.

101. Recording revenue A. increases assets and liabilities. B. increases assets and shareholders' equity. C. increases assets and decreases shareholders' equity. D. has no effect on total assets.

102. The payment of a liability A. decreases assets and shareholders' equity. B. increases assets and decreases liabilities. C. decreases assets and increases liabilities. D. decreases assets and liabilities.

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Chapter 03 - Operating Decisions and the Statement of Earnings

103. A payment of a portion of accounts payable will A. not affect total assets. B. increase liabilities. C. not affect shareholders' equity. D. decrease net earnings.

104. Which of the following items has no effect on retained earnings? A. expense B. dividends C. revenue D. hiring a new employee

105. The equality of debits and credits is the basis for A. the double-entry accounting system. B. the single-entry accounting system. C. the T account. D. all accounting systems.

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Chapter 03 - Operating Decisions and the Statement of Earnings

106. The right side of an account A. is used to record increases. B. is the credit side. C. shows all the balances of the accounts in the system. D. is used to record decreases.

107. Which one of the following represents the expanded basic accounting equation? A. Assets = Liabilities + Contributed Capital + Retained Earnings + Revenues - Expenses Dividends B. Assets + Liabilities = Dividends + Expenses + Contributed Capital + Revenues C. Assets - Liabilities - Dividends = Contributed Capital + Revenues - Expenses D. Assets = Revenues + Expenses - Liabilities

108. An accountant has debited an asset account for $500 and credited a revenue account for $1,000. What can be done to complete the recording of the transaction? A. Nothing further must be done. B. Debit a shareholders' equity account for $500. C. Debit another asset account for $500. D. Credit a different asset account for $500.

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Chapter 03 - Operating Decisions and the Statement of Earnings

109. An account will have a credit balance if the A. credits exceed the debits. B. first transaction entered was a credit. C. debits exceed the credits. D. last transaction entered was a credit.

110. Which of the following statements is true? A. Debits increase assets and increase liabilities. B. Credits decrease assets and decrease liabilities. C. Credits decrease assets and increase liabilities. D. Debits increase liabilities and decrease assets.

111. Which of the following liability accounts is likely to be satisfied with other than payment of cash? A. Wages payable B. Deferred subscriptions revenue C. Accounts Payable D. Income taxes payable

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Chapter 03 - Operating Decisions and the Statement of Earnings

112. On June 15, Tandem Toys signed a lease to rent a storefront starting on July 1st for the next two years at $1,000 per month. They paid the first two months' rent in advance on signing the lease. On June 15, how would the transaction be recorded? A. Dr. Rent expense $2,000, Cr. Cash $2,000 B. Dr. Prepaid rent $24,000, Cr. Cash $2,000 Cr. Rent payable $22,000 C. Dr. Prepaid rent $2,000, Cr. Cash $2,000 D. Dr. Rent expense $24,000, Cr. Cash $24,000

113. On December 10, 20X6 Canadian Vessels placed an order for a new maintenance vessel from a German shipbuilder. The purchase price will be $620,000, and the equipment will be delivered in March 20X7. How would this event be reported in the December 31 20X6 year-end financial statements of Canadian Vessels? A. An increase in capital assets and an increase in accrued liabilities. B. An increase in capital assets and an increase in accounts payable. C. An increase in inventory and an increase in accrued liabilities. D. The event would be disclosed in the notes to financial statements only.

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Chapter 03 - Operating Decisions and the Statement of Earnings

114. On January 1, 20X2, Grover Inc., started the year with a $22,000 credit balance in its retained earnings account. During 20X2, the company earned profit of $40,000 and declared and paid dividends of $10,000. Also, the company received cash of $15,000 as an additional investment by its owners. Therefore, the balance in retained earnings on December 31, 20X2, would be which of the following? A. $42,000. B. $52,000. C. $57,000. D. $67,000. Calculation: $22,000 + $40,000 - $10,000 = $52,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 03-05 Prepare a classified statement of earnings and explain the difference between net earnings and cash flow operations. Topic: 03-18 How is the Statement of Earnings Prepared and Analyzed?

115. Golden Company had these transactions during the accounting period: Sold merchandise for $600; its cost was $400. Collected $400 from a trade receivable. The account was established in the previous year. Used office supplies of $50. Golden's profit for the period would be which of the following? A. $50. B. $150. C. $600. D. $900. Calculation: $600 - $400 - $50 = $150.

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Chapter 03 - Operating Decisions and the Statement of Earnings

116. Cash receipts from interest are classified as A. financing activities. B. investing activities. C. operating activities. D. either financing or investing activities.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-05 Prepare a classified statement of earnings and explain the difference between net earnings and cash flow operations. Topic: 03-19 Classified Statement of Earnings

117. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is A. cash flows from investing activities. B. cash flows from operating activities. C. cash flows from financing activities. D. usually different from year to year.

118. For a merchandising company, the largest operating cash outflow would result from which of the following? A. payments to suppliers from whom we have purchased inventory on credit B. payment of wages and benefits to employees C. payment of taxes to the various government entities D. payment of interest on notes payable

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Chapter 03 - Operating Decisions and the Statement of Earnings

119. Operating cash inflows and outflows are primarily connected to which of the following? A. acquisitions and sale of long lived assets B. the sale of goods and services to customers and costs incurred to operate the business C. issuance of shares, bank borrowings and repayments, and dividend payments D. purchase and sale of long-term investments

120. Asset turnover measures A. how often a company replaces its assets. B. how efficiently a company uses its assets to generate sales. C. the portion of the assets that have been financed by creditors. D. the overall rate of return on assets.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-06 Compute and interpret the total asset turnover ratio and the return on assets. Topic: 03-19 Classified Statement of Earnings

121. A company reports sales revenue of $120 million this year and $110 million last year. Their total assets in the current year are $80 million and last year's total assets were $75 million. What is the current year's asset turnover ratio? A. 1.46 B. 1.40 C. 1.55 D. 1.61 Calculation: $120/[($80 + $75) ´ 0.5].

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 03-06 Compute and interpret the total asset turnover ratio and the return on assets. Topic: 03-19 Classified Statement of Earnings

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Chapter 03 - Operating Decisions and the Statement of Earnings

122. It is not optimal to borrow any additional funds when: A. the average borrowing costs start to equal or exceed the ROA. B. the company's net profit margin falls below the average borrowing costs. C. the company's debt-to-equity ratio exceeds 50%. D. the average borrowing costs start to equal or exceed the ROE.

123. Which of the following statements about ROA is true? A. ROA is the most important ratio for an equity investor. B. ROA reflects the risk inherent in a company. C. ROA is useful for determining how the company financed its assets. D. ROA is useful for comparing companies in different industries.

124. If Mama's Pizza reports an asset turnover ratio of 2.34 for 2019 and their competitor Pizza Hut reports 3.79 for their 2019 ratio, it means: A. Mama's Pizza is better able to pay their current obligations with their current assets. B. Mama's Pizza has been more effective in managing the use and level of its assets. C. Mama's Pizza has been less effective in managing the use and level of its assets. D. Mama's Pizza is less able to pay off their current obligations with their current assets.

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Chapter 03 - Operating Decisions and the Statement of Earnings

125. Which of the following would be included in comprehensive income but not in net income? A. Unrealized gains and losses on certain types of investments B. A gain on the sale of land C. The loss incurred due to a flood D. The loss from a plant closure

126. Comprehensive income includes all changes in equity during a period except A. gains and losses from discontinued operations. B. unrealized gains and losses on available for sale securities. C. gains and losses from irregular items. D. those resulting from investments by owners and distributions to owners.

127. What is Other Comprehensive Income? A. Income that is not related to normal earnings activities. B. Income items that bypass the income statement. C. Income included with continuing operations. D. Income from unusual activities.

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Chapter 03 - Operating Decisions and the Statement of Earnings

128. How is Accumulated Comprehensive Income reported? A. In the retained earnings section. B. In net income. C. In net income from continuing operations. D. in shareholders' equity.

Short Answer Questions 129. A student purchases a plane ticket home for Christmas break in September from Air Canada. Explain why it would be incorrect for the company to recognize revenue in September. Revenue recognition rules require that the company must perform the service in order to earn the revenue. Since the flight occurs in December, that's when Air Canada should recognize revenue.

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Chapter 03 - Operating Decisions and the Statement of Earnings

130. Explain why income measurement is meaningless if the matching principle is violated. Give an example. Under accrual accounting, revenue should be recognized when earned, and expenses should be recognized as incurred. The matching principle dictates that those costs associated with bringing in revenues match to those exact revenues in order to properly measure income for a given accounting period. For example, if you paid for a 3-year insurance policy upfront, and included its entire cost in the income statement of the current year, your insurance expense would be overstated as year 2 and year 3 insurance costs should be matched to the revenues in years 2 and 3 respectively.

131. The Upton Country Store had the following transactions in April: a. Sold $25,000 of goods to customers and received $22,000 in cash and the rest are on account b. The cost of the inventory sold was $13,000 c. The store purchased $8,000 of inventory and paid for $4,000 in cash and the rest were bought on account d. They paid $7,000 in wages for the month e. Received a $600 bill for utilities for the month that will not be paid until May f. Received rent for the adjacent store front for the months of April and May in the amount of $3,000 Complete the following statements: Cash Basis Statement of earnings

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Chapter 03 - Operating Decisions and the Statement of Earnings

Revenues: Cash Sales Rent Collected Expenses: Inventory purchases Wages paid Profit

a. b.

_____ _____

c. d. e.

_____ _____ ______

Accrual Basis Statement of earnings

Revenues: Sales to customers Rent Revenue Expenses: Cost of sales Wages expense Utilities expense Profit

f. g.

_____ _____

h. i. j. k.

_____ _____ _____ _____

(a) $22,000, (b) $3,000, (c) $4,000, (d) $7,000, (e) $14,000, (f) $25,000, (g) $1,500, (h) $13,000, (i) $7,000, (j) $600, (k) $5,900

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Chapter 03 - Operating Decisions and the Statement of Earnings

132. Fuzzly Company rendered services to customers amounting to $6,000 during 20X1; the related cash was collected as follows: $4,000 in 20X1; $2,000 in 20X2. During 20X1, $3,000 was incurred for wages expense; the related cash payments were made as follows: $1,200 in 20X1; in 20X2, $1,800. Based only on these data, provide the following amounts on accrual basis:

Amount to be reported for: Revenue Expense

20X1 $ $

20X2 $ $

Please review the following information:

Amount to be reported for: Revenue Expense

20X1 $6,000 $3,000

20X2 $0 $0

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Chapter 03 - Operating Decisions and the Statement of Earnings

133. Explain why a $500 revenue collected in advance for service would be recorded as a debit to cash and a credit to a liability account. A debit is recorded to cash because a receipt of cash increases this asset account. A corresponding credit to a liability account (unearned revenue) is appropriate because the customer is "owed" services in the future. If the services are not performed, the customer would get a refund.

134. Why might managers be tempted to violate the revenue principle and the matching principle in financial reporting? Managers want their companies to appear successful when financial statements are issued. With revenues as high as possible and expenses as low as possible, profit will be elevated. Managers might be tempted to report revenues even though the earnings process is not complete. Also, if some expenses can be put off until a later time, profit will appear larger. Often, manager bonuses are calculated based on profit. Lower profit could cause an adverse reaction in the marketplace regarding share prices. This could cause some managers to lose their jobs.

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Chapter 03 - Operating Decisions and the Statement of Earnings

135. Analysis the transactions of a business organized as a corporation described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (-) to indicate a decrease.

Assets

= Liabilities

1. Received cash for services provided. 2. Purchased office equipment on credit. 3. Paid employees' salaries. 4. Received cash from customer in payment on account. 5. Paid telephone bill for the month. 6. Paid for office equipment purchased in transaction 2. 7. Purchased office supplies on credit. 8. Dividends were paid. 9. Obtained a loan from the bank. 10. Billed customers for services performed.

Please review the following information:

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+ Shareholders' Equity

Chapter 03 - Operating Decisions and the Statement of Earnings

= Liabilities

+ +

+ Shareholders' Equity +

+, -

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-15 The Expanded Transaction Analysis Model

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Chapter 03 - Operating Decisions and the Statement of Earnings

136. For each item below, indicate whether the account needs to be debited or credited to achieve the desired effect: 1. Decrease in Accounts Payable 2. Increase in Dividends 3. Increase in Common Shares 4. Increase in Unearned Revenue 5. Decrease in Income tax Payable 6. Increase in Prepaid Insurance 7. Increase in Wages Expense 8. Decrease in Supplies 9. Increase in Revenues 10. Decrease in Accounts Receivable Please review the following information:

1. Decrease in Accounts Payable 2. Increase in Dividends 3. Increase in Common Shares 4. Increase in Unearned Revenue 5. Decrease in Income tax Payable 6. Increase in Prepaid Insurance 7. Increase in Wages Expense 8. Decrease in Supplies 9. Increase in Revenues 10. Decrease in Accounts Receivable

Dr. Dr. Cr. Cr. Dr. Dr. Dr. Cr. Cr. Cr.

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Chapter 03 - Operating Decisions and the Statement of Earnings

137. For each of the following accounts indicate (a) the type of account (Asset, Liability, Shareholders' Equity, Revenue, Expense), (b) the debit and credit effects, and (c) the normal account balance.

Example Cash

a. Asset account b. Debit increases, credit decreases c. Normal balance - debit

Accounts: 1. Accounts Payable 2. Accounts Receivable 3. Common shares 4. Dividends 5. Service Revenue 6. Insurance Expense 7. Notes Payable 8. Equipment Please review the following information:

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Chapter 03 - Operating Decisions and the Statement of Earnings

a. Liability Account. b. Debit decreases, credit increases c. Normal balance - credit. a. Asset Account. b. Debit increases, credit decreases c. Normal balance - debit. a. Shareholders' Equity Account b. Debit decreases, credit increases c. Normal balance - credit. a. Shareholders' Equity Account. b. Debit increases, credit decreases. c. Normal balance - debit. a. Revenue Account. b. Debit decreases, credit increases. c. Normal balance - credit. a. Expense Account. b. Debit increases, credit decreases c. Normal balance - debit. a. Liability Account. b. Debit decreases, credit increases. c. Normal balance - credit. a. Asset Account. b. Debit increases, credit decreases c. Normal balance - debit.

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Chapter 03 - Operating Decisions and the Statement of Earnings

138. Immediately after the adjusting entries were journalized and posted for the 20X2 year, the accounts of Way Corporation showed the following balances:

Share capital, December 31, 20X2 Retained earnings, beginning balance, January 1, 20X2 Total revenues earning during 20X2 Total expenses incurred during 20X2 Total dividends declared and paid during 20X2

$80,000 $20,000 $85,000 $65,000 $2,000

Give the amount that should be shown in each of the following accounts before any transactions are recorded for the year 20X3: Share Capital $ Retained earnings $ Please review the following information:

Share Capital Retained earnings

$80,000 $38,000

* $20,000 + $85,000 - $65,000 - $2,000 = $38,000

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Chapter 03 - Operating Decisions and the Statement of Earnings

139. You have been hired as the accountant for a newly formed real estate company called Chester Real Estate Limited. The following business transactions occurred during the month of September, 20X9: 1. Shareholders invest $50,000 in cash for 10,000 common shares to start a real estate office. 2. Signed a lease for office space. 3. Paid $200 cash for office supplies 4. Purchased office equipment for $6,000, paying $2,500 in cash and signing a 30-day, note payable for the remainder. 5. Purchased $100 of office supplies on account. 6. Real estate commissions billed to clients amount to $5,400. 7. Paid $700 in cash for the current month's rent. 8. Paid $50 cash on account for office supplies purchased in transaction 5. 9. Received a bill for $500 for advertising for the current month. 10. Paid $2,500 cash for office salaries. 11. Paid $1,000 cash dividends to shareholders. 12. Received a cheque for $3,000 from a client in payment on account for commissions billed in transaction 6. Record the transactions for September 20X9. Please review the following information:

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Chapter 03 - Operating Decisions and the Statement of Earnings

1. 2. 3. 4.

5. 6. 7. 8. 9. 10. 11. 12.

Cash Common Shares No entry Office Supplies Cash Office Equipment Cash Notes Payable Office Supplies Accounts Payable Accounts Receivable Real Estate Commission Revenue Rent Expense Cash Accounts Payable Cash Advertising Expense Accounts Payable Office Salaries Expense Cash Dividends Cash Cash Accounts Receivable

50,000 50,000 200 200 6,000 2,500 3,500 100 100 5,400 5,400 700 700 50 50 500 500 2,500 2,500 1,000 1,000 3,000 3,000

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Chapter 03 - Operating Decisions and the Statement of Earnings

140. On June 1, 20X1, Global Services, Inc., was started with $50,000 invested by the owners as share capital. On June 30, the accounting records contained the following amounts:

Trade payables Trade receivables Cash Share capital Consulting fees earned Dividends declared Office equipment Office supplies Rent expense Salary expense Supplies expense Telephone expense

$100 3,900 25,100 50,000 8,400 2,100 24,100 500 1,300 1,000 100 500

Prepare a statement of earnings for the month ended June 30, 20X1. Was the company successful in its first month of operations? Why or why not? Global Services, Inc. Statement of Earnings For the Month Ended June 30, 20X1 Revenues Consulting fees earned Expenses Rent Expense Salary Expense Supplies Expense Telephone Expense Total Expenses Net Earnings

$8,400 1,300 1,000 100 500 2,900 $5,500

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Chapter 03 - Operating Decisions and the Statement of Earnings

The company was successful in its first month of operations as it generated a healthy profit of $5,500.

141. Explain why the profit reported on the statement of earnings is usually not equal to net cash flows from operating activities on the statement of cash flows. Profit on the statement of earnings is an application of the accrual basis of accounting. Revenues are reported when earned and expenses incurred are matched to those earned revenues. The net cash flows from operating activities on the statement of cash flows are reported on the cash basis of accounting. That is, amounts received from customers and amounts paid for expenses are on the statement of cash flows. Therefore, the difference in profit and net cash from operating activities is a timing issue.

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Chapter 03 - Operating Decisions and the Statement of Earnings

142. Emploi Maintenant LLC (EML) operates an employment center in a local mall. The company works closely with Service Canada to provide access to employment opportunities for young adults and recent graduates. The shareholder and general manager is Marie-France Tessier. During the month of April, the following activities occurred: 1. On April 1, Marie-France decided to replace four computers that are available for clients to use in the center. EML donated the old computers to "Computers in Haiti" a charity that refurbishes and supplies old computers to schools in Haiti. EML paid $5,220 cash for the new machines. The new computers are expected to last for 3 years at which time they will also be donated to charity. 2. The company made cash sales of $11,400 worth of coffee and snacks during April. Another $800 in sales on account was made for a seminar that Marie-France presented in the adjoining office building. She expects to collect that amount in 30 days. 3. In conjunction with a study of similar companies in other cities, EM sold their first memberships for $1,800, which entitle the holder complete data base access for six months. EM also collected $350 in user fees from non-members during the month. 4. Staff wages paid during the month was $875. $175 of this amount related to work done in March and no one has been paid for the last three days of April, a total of $95. 5. The utilities, including data base fees and internet access fee, are paid in advance for a twomonth period. They total $360 per month and were paid on April 15. 6. Monthly rent of $2,000 was paid. 7. Marie-France ordered a new soda dispenser and other supplies for the snack bar totaling $5,000 and paid the $4,500 outstanding accounts payable from March. At the beginning of April, she had estimated that there was $600 in supplies inventory on hand, and at April 30 supplies inventory was estimated at $1,000. 8. On April 30, EM repaid in full a $5,000 loan to Marie-France, who had lent money to EM when it first opened. She had been charging 6% interest on the loan and the interest was paid at the end of every month. 9. The income tax rate is 25%. Required: Prepare a proper form multiple step statement of earnings for the month of April.

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Chapter 03 - Operating Decisions and the Statement of Earnings

Suggested approach: Analyze each event to determine the effects on revenues and expenses only. Depreciation on new computers for one month $5,220/36 months ´ 1 month = $145. Sales = $11,400 + $800 Membership revenues = $1,800/6 = $300 + $350 user fees = $650 Wages for April = Amt paid $875 - March wages $175 + April accrual $95 = $795 Utilities $360 per month Rent expense $2,000 April purchases $5,000 + Beginning inventory $600 - Ending inventory $1,000 = COGS $4,600 Interest on loan for one month $5,000 ´ 6 ´ 1/12 = $25 Tax rate 25% ´ Income before income taxes $4,925 = $1,231 (rounded)

Emploi Maintenant LLC Statement of Earnings For the Month Ending April 30, 20X6 Revenues Cost of goods sold Gross Profit Operating expenses Rent Wages Utilities Depreciation Total operating expenses Net income before interest and income taxes Interest expense Net income before income taxes Income tax expense Net Earnings

$12,850 4,600 8,250 2,000 795 360 145 3,300 4,950 25 4,925 1,231 $3,694

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Chapter 03 - Operating Decisions and the Statement of Earnings

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 03-05 Prepare a classified statement of earnings and explain the difference between net earnings and cash flow operations. Topic: 03-19 Classified Statement of Earnings

143. The following data is from Gauthier Machine Shop:

Total Assets Total Liabilities Total Shareholders' Equity Sales Profit

20X3 $500,000 $200,000 $300,000 $1,000,000 $140,000

20X2 $475,000 $190,000 $285,000 $900,000 $120,000

20X1 $450,000 $170,000 $280,000 $820,000 $110,000

Compute Gauthier Machine Shop's asset turnover ratio for the two most recent years (a) 20X3 __________ (b) 20X2 __________ (a) 2.05, (b) 1.95

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Chapter 04 Adjustments, Financial Statements, and the Quality of Earnings

True / False Questions 1. Expenses paid before being used or consumed are initially recorded as liabilities. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-01 Adjusting Revenues and Expenses

2. Accrued revenues represent money received from customers for work to be done later. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-04 Types of Adjustments

3. Prepaid expenses are costs that are paid for before they are used. TRUE

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

4. An adjusting entry to a prepaid expense is required to recognize costs that expire with time. TRUE

5. The accounting cycle begins with the journalizing of the transactions. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-02 Accounting Cycle

6. The accounting cycle ends with the preparation of financial statements for publishing. FALSE

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-04 Types of Adjustments

7. Expenses that are incurred with the passage of time such as insurance expense do not require an adjusting entry. FALSE

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-04 Types of Adjustments

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

8. Depreciation expense cannot be recorded on a fully depreciated item. TRUE

9. At the end of the accounting period, wages earned by employees but not yet recorded nor paid amounted to $400; therefore, the adjusting entry should be: Debit--Wages payable; Credit - Wages expense. FALSE

10. A trial balance is a list of all accounts with their debit or credit balances indicated in the appropriate column to provide a check on the equality of the sum of debits and credits. TRUE

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

11. To compute depreciation expense using the straight-line formula, the cost of a depreciable asset (i.e., equipment) must be reduced by any estimated residual or salvage value. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-04 Types of Adjustments

12. The unadjusted trial balance does not reflect adjusting entries. TRUE

13. Expenses paid in advance of the use of services or goods give rise to an asset until the goods and services are used, consumed, or expired. TRUE

14. Each adjusting entry affects at least one income statement account and at least one statement of financial position account. TRUE

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

15. An expense incurred, but not yet recorded nor paid, creates a liability until the payment is made. TRUE

16. Adjusting entries are typically entered in the accounts at the end of the accounting period. TRUE

17. Adjusting entries are used to update income statement accounts and statement of financial position accounts. TRUE

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

18. Rent of $150 collected in advance was credited to rent revenue. At the end of the accounting period, it was still unearned. The related adjusting entry should be: Debit-- Rent revenue, $150; Credit--Unearned rent revenue, $150. TRUE

19. Service revenue earned but not yet collected by the end of the period was $200; therefore, the adjusting entry should be: Debit--Service revenue receivable, $200; Credit--Unearned service revenue, $200. FALSE

20. During the accounting period, an expense paid in advance and debited to prepaid expense was $180; therefore, the adjusting entry for the expiration of this item should be to debit an expense account for $180 and credit a prepaid expense account for $180. TRUE

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

21. On July 1, 20X1, Liz Company borrowed $5,000 cash and signed a one year note payable, interest 10 percent, payable on the maturity date, June 30, 20X2. The accounting period ends on December 31; therefore, the required adjusting entry on December 31, 20X1 would be: Debit--Interest payable, $250; Credit--Interest expense, $250. FALSE

22. Adjusting entries are recorded in the journal (i.e., journalized) but they are not posted to the ledger. FALSE

23. Both the adjusting entries and the closing entries usually are dated as of the last day of the accounting period. TRUE

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

24. Adjustment entries are most likely to be unnecessary when cash flow occurs after the transaction. FALSE

25. An adjusted trial balance is usually developed to show the balances in all the accounts after the effects of the adjusting and closing entries. FALSE

26. Amortization expense is an example of the need for accountants to make estimates in order to record adjustments. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-03 Compute and interpret the net profit margin ratio and the return on equity. Topic: 04-12 Statement of Financial Position

27. Those firms that make relatively conservative estimates for their accrued and deferred adjustments are said to have financial reports disclosing a higher quality of earnings. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-02 Prepare a statement of earnings with earnings per share, a statement of changes in equity, and a statement of financial position. Topic: 04-10 Statement of Earnings

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

28. Amortization attempts to adjust the value of the assets to reflect the market value of those assets on the statement of financial position. FALSE

29. External auditors closely examine the adjustment process of a company because adjustments are the most complex part of the accounting process and therefore the most error prone. TRUE

30. The statement of cash flows is designed to explain the causes of changes in the cash account during the period that resulted from the inflows and outflows of cash. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 04-03 Compute and interpret the net profit margin ratio and the return on equity. Topic: 04-12 Statement of Financial Position

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

31. When preparing the statement of financial position, the balance of Retained Earnings is taken from the Adjusted Trial Balance. FALSE

32. Earnings per share (EPS) amounts must be reported on the statement of financial position of corporations. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 04-02 Prepare a statement of earnings with earnings per share, a statement of changes in equity, and a statement of financial position. Topic: 04-10 Statement of Earnings

33. Analysts, investors, and creditors use these same statements to evaluate performance as part of their share valuation and credit evaluation judgments. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 04-03 Compute and interpret the net profit margin ratio and the return on equity. Topic: 04-12 Statement of Financial Position

34. The three sections of the statement of cash flows are operating, marketing, and financing activities. FALSE

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

35. The statement of cash flows shows the cash inflows, cash outflows, and change in cash for a period. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 04-03 Compute and interpret the net profit margin ratio and the return on equity. Topic: 04-12 Statement of Financial Position

36. Earnings per share is widely used in evaluating the operating performance and profitability of a company and is the only ratio required to be disclosed on the statement of earnings or in the notes to the financial statements. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 04-02 Prepare a statement of earnings with earnings per share, a statement of changes in equity, and a statement of financial position. Topic: 04-10 Statement of Earnings

37. Profit under accrual timing is subject to more distortion than cash flow from operations because of large accruals and deferrals that can impact reported profit. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 04-03 Compute and interpret the net profit margin ratio and the return on equity. Topic: 04-12 Statement of Financial Position

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

38. The net profit margin ratio (Profit ÷ Net Sales) measures the degree to which management was able to control costs. TRUE

39. The return on equity measures how effectively management used shareholders' investment to generate revenue during the period. TRUE

40. Permanent accounts are reset to zero to prepare for the next accounting period. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-14 End of the Accounting Cycle

41. Permanent accounts are balance sheet accounts. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-14 End of the Accounting Cycle

4-12

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

42. The failure to close the books in the current accounting period will results in incorrect account balances in both the income statement and the balance sheet. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-14 End of the Accounting Cycle

43. Unearned revenues need to be closed as part of the closing process at the end of the year. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-14 End of the Accounting Cycle

44. Temporary accounts are closed to a zero balance at the end of the accounting period to allow for the accumulation of profit items in the following period. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

45. The dividends declared account should be closed to retained earnings at year-end. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

4-13

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

46. Revenue and expense accounts often are called temporary (nominal) accounts because their balances are closed out at the end of the accounting year. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

47. The Income Summary account is a permanent account. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-14 End of the Accounting Cycle

48. Closing entries are prepared before adjusting entries. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

49. Financial statements are generally prepared after the closing entries are posted and finalized. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-14 End of the Accounting Cycle

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

50. Closing entries result in the transfer of net profit or loss into the Retained Earnings account. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

51. The post-closing trial balance will have balance sheet and income statement accounts. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

Multiple Choice Questions 52. An adjusted trial balance A. is prepared after the financial statements are completed. B. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made. C. is a required financial statement under international financial reporting standards. D. cannot be used to prepare financial statements.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

53. Joe Company purchased supplies inventory for $5,000. Due to an error in posting, the inventory account was debited for only $500 when trade payables were credited for $5,000. During which phase of the accounting information cycle, would this error be discovered? A. recording transaction in the journal. B. preparation of the financial statements. C. preparation of the trial balance. D. analysis of each transaction.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-02 Accounting Cycle

54. Which is the correct order of the steps in the accounting cycle during the accounting period? A. transaction analysis, journal entries, trial balance B. transaction analysis, posting to the accounts, journal entries C. transaction analysis, posting to the accounts, adjusting the accounts D. transaction analysis, journal entries, posting to the accounts

55. The process that begins with analyzing transactions and ends with the preparation of a post-closing trial balance is called A. the fiscal period. B. the business cycle. C. the accounting period. D. the accounting cycle.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

56. On January 1, 20X1, Thomas Company paid $5,000 for a two-year insurance policy on the building. The accounting period ends on December 31. At the end of 20X1, the financial statements should report which of the following?

A. B. C. D.

On the Statement of Financial Position Prepaid insurance, $0 Prepaid insurance, $1,250 Prepaid insurance, $2,500 Prepaid insurance, $5,000

On the Statement of Earnings Insurance expense, $5,000 Insurance expense, $1,250 Insurance expense, $2,500 Insurance expense, $0

A. Choice A B. Choice B C. Choice C D. Choice D

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

57. On March 1, 20X1, the premium on a two-year insurance policy on equipment was paid amounting to $1,800. At the end of 20X1 (end of the accounting period), the financial statements for 20X1, would report which of the following? A. Insurance expense, $0; Prepaid insurance $1,800. B. Insurance expense, $750; Prepaid insurance $1,050. C. Insurance expense, $900; Prepaid insurance $900. D. Insurance expense, $1,800; Prepaid insurance $0.

58. On April 1, 20X1, Allen Company signed a $12,000, one-year, 10 percent note payable. At due date, April 1, 20X2, the principal and interest will be paid. Interest expense should be reported on the statement of earnings (for the year ended December 31, 20X1) as which of the following? A. $700. B. $800. C. $900. D. $1,200.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

59. On January 1, 20X2, the ledger of Global Corporation correctly showed supplies inventory of $500. During 20X2, supplies purchases amounted to $700. A count (inventory) of supplies on hand at December 31, 20X2, showed $400. The 20X2 statement of earnings should report supplies expense amounting to which of the following? A. $700. B. $800. C. $1,100. D. $1,200.

60. A legal firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to Unearned Service Revenue. If the legal services have been provided at the end of the accounting period and no adjusting entry is made, this would cause: A. unearned revenues to be understated. B. profit to be overstated. C. liabilities to be understated. D. revenues to be understated.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

61. Prepaid expenses are A. paid and recorded in an asset account before they are used or consumed. B. paid and recorded in an asset account after they are used or consumed. C. incurred but not yet paid or recorded. D. incurred and already paid or recorded.

62. The Town Laundry purchased $5,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $3,000 on hand. The adjusting entry that should be made by the company on June 30 is A. debit Laundry Supplies Expense, $3,000; credit Laundry Supplies, $3,000. B. debit Laundry Supplies Expense, $2,500; credit Laundry Supplies, $2,500. C. debit Laundry Supplies, $2,500; credit Laundry Supplies Expense, $2,500. D. debit Laundry Supplies, $3,000; credit Laundry Supplies Expense, $3,000.

63. On July 1, Rawling Store paid $6,000 to Iceberg Realty for six months' rent, starting July 1. Prepaid rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by Rawling Store is A. debit rent expense, $6,000; credit prepaid rent, $6,000. B. debit prepaid rent, $1,000; credit rent expense, $1,000. C. debit prepaid rent, $6,000; credit rent expense, $6,000. D. debit rent expense, $1,000; credit prepaid rent, $1,000.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

64. The balance in the Prepaid Rent account before adjustment at the end of the year is $12,000 and represents three months' rent starting on November 1. The adjusting entry required on December 31 is A. debit prepaid rent, $4,000; credit rent expense $4,000. B. debit prepaid rent, $8,000; credit rent expense, $8,000. C. debit rent expense, $12,000; credit prepaid rent, $12,000. D. debit rent expense, $8,000; credit prepaid rent, $8,000.

65. The Pitter Corporation purchased a notebook computer for $3,000 on December 1. The useful life of the notebook computer is estimated to be 5 years. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: A. debit depreciation expense, $600; credit accumulated depreciation, $600. B. debit depreciation expense, $50; credit accumulated depreciation, $50. C. debit depreciation expense, $2,400; credit accumulated depreciation, $2,400. D. debit office equipment, $50; credit accumulated depreciation, $50.

66. An adjusted trial balance shows that A. all journal entries have been made. B. debits equal credits in the ledger accounts after the adjusting entries have been made. C. all accounts have the correct balance. D. no posting errors have been made.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

67. Ultra Realty received a cheque for $21,000 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rental Revenue was credited for the full $21,000. Financial statements will be prepared on July 31. Ultra Realty should make the following adjusting entry on July 31: A. debit Unearned Rental Revenue, $3,500; credit Rental Revenue, $3,500. B. debit Rental Revenue, $3,500; credit Unearned Rental Revenue, $3,500. C. debit Unearned Rental Revenue, $21,000; credit Rental Revenue, $21,000. D. debit Cash, $3,500; credit Rental Revenue, $3,500.

68. At the end of its accounting period, December 31, 20X2, May Corporation owed $1,000 for property taxes which had not been recorded nor paid. Therefore, the 20X2 adjusting entry should be which of the following? A. $1,000 credited to an expense account and debited to a liability account. B. $1,000 debited to an expense account and credited to an asset account. C. $1,000 credited to a liability account and debited to an expense account. D. $1,000 debited to a liability account and credited to an asset account.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

69. On October 1, 20X1, Ethan Company borrowed $10,000 on a 4-month note with an annual interest rate of 9 percent. How much interest expense should be reported for 20X1, assuming that the note is paid on time and Ethan Company's accounting year coincides with the calendar year? A. $-0-. B. $225. C. $300. D. $900.

70. The primary difference between prepaid and accrued expenses is that prepaid expenses have A. been incurred and accrued expenses have not incurred. B. not been paid and accrued expenses have been paid. C. been paid and accrued expenses have not been paid. D. not been recorded and accrued expenses have been recorded.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

71. Assume Minor Company recorded the following adjusting entry at year-end:

Dr Insurance expense Cr Prepaid insurance

$800 $800

If the beginning balance in prepaid insurance was $700 and $1,500 was paid for an insurance premium during the year, the ending balance in the prepaid insurance account (after the above adjusting entry) would be which of the following? A. $100 debit. B. $1,400 debit. C. $1,500 debit. D. $2,200 debit.

72. An accountant has billed her clients for services performed in October. In November, she receives payments from her clients. What entry will she make upon receipt of the payments? A. debit unearned revenue and credit service revenue. B. debit cash and credit accounts receivable. C. debit accounts receivable and credit service revenue. D. debit cash and credit service revenue.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

73. Which of the following is an example of an adjusting entry? A. Recording the payment of year-end dividends. B. Recording the receipt of inventory in the last week of the year that will be paid next year. C. Recording the salary expense earned in the last week of the year, to be paid next year. D. Recording the increase in the market value of land.

74. Which of the following statements about adjusting entries is true? A. Adjusting entries always include at least one balance sheet account and one income statement account. B. Adjusting entries may involve the cash account. C. Adjusting entries always involve an expense account. D. Adjusting entries are required whenever the accounting records are updated.

75. Failure to make an adjusting entry to recognize service revenue receivable would cause which of the following? A. an overstatement of assets, profit, and shareholders' equity. B. an overstatement of assets and shareholders' equity and an understatement of profit. C. no effect on assets, liabilities, profit, nor shareholders' equity. D. an understatement of assets, profit, and shareholders' equity.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

76. Which of the following is not an example of an adjusting entry? A. Recording unpaid interest at year end relating to an outstanding loan balance. B. Recording amortization on office computers purchased during the year. C. Recording the loss on the sale of equipment made during the year. D. Reducing the prepaid rent account for the portion of rent consumed.

77. Manfretti Corporation received cash of $12,000 on August 1, 20X7 for one year's rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 20X7 adjusting entry is A. debit rent revenue and credit unearned rent, $5,000. B. debit rent revenue and credit unearned rent, $7,000. C. debit unearned rent and credit rent revenue, $5,000. D. debit cash and credit unearned rent, $7,000.

78. Which of the following would normally be recorded with an adjusting entry? A. Sales on credit B. Payment for supplies bought on account C. Depreciation expense D. Salaries expense

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

79. Manitoba Metals Ltd lent $100,000 to Coltraine Ltd. at an interest rate of 5%. Both the loan and all the interest are to be repaid after two years. At the end of the first year what is the entry required on Manitoba's books? (Dr.=Debit and Cr.=Credit) A. Dr. Interest expense $5,000, Cr. Interest payable $5,000 B. Dr. Interest receivable $5,000, Cr. Interest revenue $5,000 C. Dr. Interest revenue $5,000, Cr. Interest payable $5,000 D. no entry is required until the amount becomes due.

80. At the end of 20X4, Dallas Company made the following adjusting entry to record $10,000 accrued (unpaid) wages:

Dr Wage expense Cr Wages payable

10,000 10,000

A payroll of $40,000 (including the $10,000 accrued wages) was paid during the first week of January, 20X5. The entry to record the payment of this payroll should include a A. $10,000 debit to wages expense and a $30,000 debit to wages payable. B. $30,000 debit to wages expense and a $10,000 debit to wages payable. C. $40,000 debit to wages expense and a $10,000 debit to wages payable. D. $50,000 debit to wages expense and a $10,000 debit to wages payable.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

81. Which of the following is the essential difference between an unadjusted trial balance and an adjusted trial balance? A. An unadjusted trial balance is prepared at the start of the accounting year, while an adjusted trial balance is prepared at the end of the year. B. An unadjusted trial balance is prepared by companies which make adjusting entries, while an adjusted trial balance is prepared by companies that do not make adjusting entries. C. An unadjusted trial balance is prepared before the adjusting entries are reflected, while an adjusted trial balance is prepared after the adjusting entries are reflected. D. An unadjusted trial balance is prepared after the post-closing trial balance.

82. The difference between the equipment account balance and the accumulated amortization equipment account balance is called which of the following? A. market value B. acquisition cost C. net realizable value D. net book value

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

83. Which of the following accounts would most likely lead to a deferred adjustment? A. Prepaid expenses B. Wages payable C. Subscriptions revenue receivable D. Rent receivable

84. Which of the following would most likely lead to an accrued adjustment? A. Interest revenue earned but not yet collected. B. Prepaid insurance C. Prepaid wages. D. Rent received in advance.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

The earnings statement of Waylon Taylor Textiles Ltd. for 20X7 included the following items:

Interest revenue Salaries expense Insurance expense

$75,500 $65,000 $9,600

The following balances have been excerpted from the company's Statement of Financial Position:

Accrued interest receivable Accrued salaries payable Prepaid insurance

December 31, 20X7 $9,100

December 31, 20X6 $7,500

$8,900

$4,200

$1,100

$1,500

85. How much cash did WTT receive for interest during 20X7? A. $75,500 B. $77,100 C. $73,900 D. $66,400

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Learning Objective: 04-03 Compute and interpret the net profit margin ratio and the return on equity. Topic: 04-04 Types of Adjustments Topic: 04-12 Statement of Financial Position

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

86. How much cash did WTT pay out for salaries during 20X7? A. $69,700 B. $60,300 C. $73,900 D. $60,800

87. How much cash did WTT pay out for insurance during 20X7? A. $8,500 B. $8,100 C. $10,000 D. $9,200

88. Auto Kool has implemented a policy that requires all tools expenditures below$100 to be expensed. This is an application of A. the matching principle. B. the materiality constraint. C. the full disclosure principle. D. representational faithfulness.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

89. Charging the cost of a wastebasket with an estimated useful life of 10 years to an expense account when purchased is an example of the application of A. the historical cost principle. B. the matching principle. C. the materiality constraint. D. the full disclosure principle.

90. Which of the following statements about materiality is not correct? A. An item is material if its inclusion or omission would influence or change the judgement of a reasonable person. B. The amount involved must make a difference or it should not be disclosed. C. Materiality is a matter of both its nature and relative size. D. A traditional guideline for auditors is 5 to 10 percent of net earnings.

91. Which of the following statements is true about earnings per share(EPS)? A. It is the only ratio required to be disclosed on the statement of earnings. B. It assesses the ability of the firm to pay their bills as they come due. C. It evaluates the efficiency with which the company uses their assets to generate sales revenue. D. It represents the profit available to the preferred shareholders.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 04-02 Prepare a statement of earnings with earnings per share, a statement of changes in equity, and a statement of financial position. Topic: 04-10 Statement of Earnings

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

The bank statements of Waylon Taylor Textiles Ltd. for 20X7 included the following items:

Insurance premiums paid Interest collected Salaries paid

$12,400 $25,900 $125,200

The following balances have been excerpted from the company's Statement of Financial Position:

Prepaid insurance Accrued interest receivable Accrued salaries payable

December 31, 20X7 $1,400 $3,700

December 31, 20X6 $1,700 $2,900

$12,300

$10,600

92. How much insurance expense should WTT report on its 20X7 statement of earnings? A. $15,100 B. $12,700 C. $12,100 D. $9,600

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 04-02 Prepare a statement of earnings with earnings per share, a statement of changes in equity, and a statement of financial position. Topic: 04-10 Statement of Earnings

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

93. How much interest revenue should WTT report on its 20X7 statement of earnings? A. $19,300 B. $25,100 C. $32,500 D. $26,700

94. How much salaries expense should WTT report on its 20X7 statement of earnings? A. $126,900 B. $123,500 C. 102,300 D. $148,100

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

95. Before the closing entries were made at the end of 20X2, the following data were taken from the accounts of Joe Corporation:

Share capital Retained earnings, beginning balance January 1, 20X2 Total revenue earned during 20X2 Total expenses incurred during 20X2 Total cash collected during 20X2

$70,000 100,000 300,000 200,000 40,000

What is the amount of shareholders' equity that should appear on Joe Corporation's statement of financial position dated December 31, 20X2? A. $300,000. B. $270,000. C. $230,000. D. $110,000.

96. Because of its complexity and susceptibility to errors, which step in the accounting process do independent auditors examine most closely? A. Financial statement preparation B. Tax reports C. Deferred and accrued adjustments D. Closing entries

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

97. For the year 20X1, Tally Corporation reported $50,000 pre-tax profit (average annual income tax rate of 40%). What was the after-tax profit? A. $10,000. B. $15,000. C. $20,000. D. $30,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 04-02 Prepare a statement of earnings with earnings per share, a statement of changes in equity, and a statement of financial position. Topic: 04-10 Statement of Earnings

98. Time Corporation reported the following for 20X1:

Share Capital Revenues Expenses

5,000 shares outstanding $100,000 $95,000

What was the amount of earnings per share? A. $1.00. B. $2.00. C. $19.00. D. $20.00.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

99. At the end of 20X3, Libby Company reported an ending balance for retained earnings of $50,000. During20X4, the company reported the following amounts: dividends declared and paid $30,000, and profit $40,000. The 20X4 retained earnings account should report an ending balance of A. $60,000. B. $80,000. C. $90,000. D. $100,000.

100. Which of the following statements best describes the relationship between profit for the period and the ending balance in retained earnings? A. Profit for the period reduces the ending balance of retained earnings. B. Retained earnings at the end of the period increases the amount of profit. C. Profit for the period increases the ending balance of retained earnings. D. Profit for the period has no effect on the ending balance of retained earnings.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 04-02 Prepare a statement of earnings with earnings per share, a statement of changes in equity, and a statement of financial position. Topic: 04-11 Statement of Changes in Equity

101. A Statement of Earnings reports which of the following? A. revenues, expenses, assets, and liabilities during an accounting period. B. profit of a business at a point in time. C. profit of a business for a period of time. D. resources, liabilities, and shareholders' equity of a business at a point in time.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 04-02 Prepare a statement of earnings with earnings per share, a statement of changes in equity, and a statement of financial position. Topic: 04-10 Statement of Earnings

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

102. Which of the following errors would most likely lead to an overstatement of income? A. Recording revenue in the next period when the cash is collected although it is earned in the current year. B. Recording an expense incurred in this year when the cash is paid next year. C. Failure to adjust deferred rent revenue account for the portion of rent earned this year. D. Failure to adjust prepaid expenses account for the portion of insurance expired this year.

103. The statement of changes in shareholder's equity A. is a required statement under private entity GAAP B. is a required statement under IFRS C. is a required statement under both private entity GAAP and IFRS D. is not a required statement under either private entity GAAP or IFRS

104. Financial statements should be prepared: A. using the retained earnings account. B. using an unadjusted trial balance. C. from a post-closing trial balance. D. from an adjusted trial balance.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

105. The basic financial statements prepared for external users do not include which of the following? A. The statement of financial position. B. The income statement. C. The revenue statement. D. The statement of cash flows.

106. The statement of changes in equity would not include which of the following? A. Profit. B. Net sales. C. The closing balance in the relevant accounts from the previous year. D. Dividends declared.

107. If a business declared and paid a $500 dividend, it would appear on which of the following? A. Income statement only. B. Statement of financial position only. C. Statement of changes in equity and the statement of cash flows. D. Statement of changes in equity only.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 04-03 Compute and interpret the net profit margin ratio and the return on equity. Topic: 04-11 Statement of Changes in Equity

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

108. Profit would appear on which of the following? A. Income statement only. B. Statement of financial position only. C. Statement of changes in equity and income statement. D. Income statement and statement of financial position.

109. The statement of cash flows does which of the following? A. Explains what caused profit during the accounting period. B. Identifies all assets held at the end of the accounting period by type and amount. C. Explains that the trial balance is in balance. D. Explains all the sources and uses of cash during the accounting period.

110. In a classified statement of financial position which of the following is NOT true A. The asset and liability sections are divided into short-term and long-term sections. B. The long-term assets and liabilities are presented before the short- term assets and liabilities. C. Shareholders' equity is made up of retained earnings and share capital. D. The current assets are listed in order of liquidity.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

111. On the cash flow statement, the changes in revenues and expenses caused by accruals and deferrals are classified as which of the following? A. investing activities B. financing activities C. operating activities D. non-operating activities.

112. Manfred Mann Corporation's books revealed the following data for the current year:

Net earnings Retained earnings Common shares January 1 Common shares December 31

$50,000 $750,000 25,000 shares 30,000 shares

The earnings per share is closest to: A. $30.50 B. $2.00 C. $1.67 D. $1.82

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

113. Which of the following is one of the sections on the statement of cash flows? A. Operating activities B. Lending activities C. Borrowing activities D. Marketing activities

114. A calendar year reporting company preparing its annual financial statements should use the phrase "At December 31, 20X9" in the heading of which of the following? A. All the required financial statements it prepares. B. The statement of financial position only. C. The Statement of Earnings and statement of financial position. D. The Statement of earnings, but neither the statement of financial position nor the statement of cash flows.

115. The statement of earnings is prepared by using the revenue and expense account balances from the A. trial balance. B. ledgers. C. adjusted trial balance. D. journal.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 04-03 Compute and interpret the net profit margin ratio and the return on equity. Topic: 04-10 Statement of Earnings

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

116. The primary purpose of the statement of cash flows is to report which of the following? A. profit earned and dividends paid during the period. B. all inflows and outflows of cash during the period. C. assets owned and claims against those assets at the end of the period. D. liability changes made by the financial department of the company during the period.

117. Which of the following statements about a high net profit margin is FALSE? A. It demonstrates how effective your business is at converting sales into profit. B. It may mean that you are capitalizing on some competitive advantage that can provide your business with extra capacity and flexibility during the hard times. C. It may mean that you are keeping your operating expenses under control to earn an acceptable profit. D. It may mean that your business might need to take on debt to pay its expenses.

118. Return on equity is a ratio that: A. is calculated by dividing profit plus preferred dividends by average common shareholders' equity. B. cannot be calculated if the company has preferred shares in addition to common shares. C. shows the relationship between net earnings and retained earnings. D. shows the relationship between net earnings and average shareholders' equity.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

119. At the end of 20X4, the following data were taken from the accounts of Timberline Company:

Share capital Retained earnings, beginning balance January 1, 20X4 Total revenue earned during 20X4 Total expenses incurred during 20X4 Total cash collected during 20X4

$209,000 100,000 190,000 180,000 200,000

The 20X4 closing entries would include which of the following? A. $10,000 net credit to retained earnings. B. $10,000 net debit to retained earnings. C. $190,000 debit to retained earnings. D. $180,000 credit to retained earnings.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

120. The purpose of the post-closing trial balance is to A. prove the equality of the temporary account balances that are carried forward into the next accounting period. B. list all the balance sheet accounts in alphabetical order for easy reference. C. prove the equality of the permanent account balances that are carried forward into the next accounting period. D. prove that no mistakes were made.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-15 Post-closing Trial Balance

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

121. The final step in the accounting cycle is to prepare A. closing entries. B. adjusting entries. C. financial statements. D. a post-closing trial balance.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-15 Post-closing Trial Balance

122. Which of the following applies to both the depreciation expense account and the accumulated depreciation account at the end of the first year of operations? A. They are closed. B. They appear in a trial balance prepared prior to the adjusting and closing entries. C. They are not closed at the end of the accounting period. D. They appear in a trial balance prepared after the adjusting entries but before the closing entries.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

123. A post-closing trial balance will show account balances for which of the following? A. permanent and temporary accounts. B. permanent accounts only. C. temporary accounts only. D. income statement accounts only.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-15 Post-closing Trial Balance

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

124. Which one of the following accounts would not be closed at the end of the accounting year? A. Rent expense. B. Dividends payable. C. Sales revenue. D. Salaries expense.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

125. A trial balance prepared after the closing entries have been posted would exclude which one of the following accounts? A. Inventory. B. Trade receivables. C. Accumulated depreciation. D. Service revenue.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

126. Closing entries A. are prepared before the financial statements. B. reduce the number of permanent accounts. C. cause the revenue and expense accounts to have zero balances. D. summarize the activity in every account.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

127. Select the statement that best describes the primary purpose of preparing closing entries. A. To facilitate adjusting entries. B. To reduce the balances in the temporary accounts to zero in order to accumulate the revenues and expenses of the next period. C. To complete the recording of various transactions which are begun in one period and concluded in a later period. D. To determine the amount of profit or loss for the period.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

128. The purpose of preparing the post-closing trial balance is to A. prove the equality of the permanent account balances that are carried forward into the next accounting period. B. prove the equality of the temporary account balances that are carried forward into the next accounting period. C. list all the statement of financial position accounts in alphabetical order for easy reference. D. prove that no mistakes were made.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-14 End of the Accounting Cycle Topic: 04-15 Post-closing Trial Balance

129. Which of the following is true about closing the books of a corporation? A. Expenses are closed to the Expense Summary account. B. Only revenues are closed to the Income Summary account. C. Revenues and expenses are closed to the Income Summary account. D. Revenues, expenses, and the Dividends account are closed to the Income Summary account.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

130. A post-closing trial balance will show A. zero balances for all accounts. B. zero balances for statement of financial position accounts. C. only statement of financial position accounts. D. only income statement accounts.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-15 Post-closing Trial Balance

Short Answer Questions 131. Explain the difference between the income statement and the income summary account. The income statement shows profit or loss for a given accounting period. The income summary account is a temporary account used in the closing process. Revenue and expense accounts are closed against income summary.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

132. Explain the difference between a classified versus non-classified statement of financial position. Which is more informative to users? Why? An unclassified balance sheet is one in which items are grouped into assets, liabilities and equity. A classified balance sheet organizes assets and liabilities into subgroups. Typically, this means current assets, non-current assets, property, plant and equipment and intangible assets, current liabilities, non-current liabilities and equity. This better organizes the accounts and provides more useful information for end users.

133. Jack the newly hired accountant found an insurance expense account in addition to an account called prepaid insurance in the post-closing trial balance. Should he be concerned? Explain. Yes, he should be concerned. While the prepaid insurance account is an asset and thus a permanent account, the insurance expense account should not be there as expense or temporary accounts should have been closed in the closing process.

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Hard Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-14 End of the Accounting Cycle

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

134. Match the following entry descriptions with the accounting entries to which they relate by placing the appropriate letter to the left. A letter may be used more than once. A. Adjusting entries. B. Closing entries. C. All the entries listed above. D. None of the entries listed above. ____ 1. May be initially recorded in the general ledger. ____ 2. They must be determined before the financial statements for the period are prepared. ____ 3. Clears the temporary account balances at the end of the period. ____ 4. Clears the permanent account balances at the end of the period. ____ 5. They affect both temporary and nominal accounts. 1. D; 2. A; 3. B; 4. D; 5. C

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-05 Adjustment Process Topic: 04-13 Closing the Books

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

135. On September 1, 20X1, RF Corporation collected rent of $2,400 for one year in advance. The three possible ways in which RF Corporation could have recorded the transaction on September 1, 20X1, (i.e., the original journal entry) are listed below. Also listed are three different adjusting entries that could be made on December 31, 20X1 (the end of the accounting year). Match each journal entry with the appropriate adjusting entry. Journal Entry, Sept. 1, 20X1. A. Cash Rent revenue

2,400 2,400

B. Cash Unearned rent revenue

2,400 2,400

C. Cash Rent revenue Unearned rent revenue

2,400 800 1,600

Adjusting Entry, Dec 31, 20X1 1. Unearned rent revenue Rent revenue

800 800

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

2. Rent revenue Unearned rent revenue

1,600 1,600

3. No adjusting entry needed 1. B; 2. A; 3. C

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Hard Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-05 Adjustment Process

136. All the accounts in an accounting system can be classified broadly as either: A. Income statement accounts. B. Statement of financial position accounts. Below are listed some other classifications of accounts. You are to identify them with the above classifications by entering either A or B to the left of each. ____ 1. Temporary accounts. ____ 2. Not closed at the end of the accounting period. ____ 3. Permanent accounts. ____ 4. Closed at the end of the accounting period. 1. A; 2. B; 3. B; 4. A.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

137. This question focuses on the accounting cycle and the accounting model. For each item listed, indicate the best description by entering a capital letter in the space provided. Description A. End-of-period entries to transfer balances of temporary accounts to another account. B. Income statement accounts. C. Revenues collected but not earned. D. Revenues minus expenses. E. An expense incurred but not recorded nor paid. F. Ending retained earnings. G. Statement of financial position accounts. H. Entries at the end of the period necessary to measure income. Item ____ 1. Accrued expense ____ 2. Temporary accounts ____ 3. Closing entries ____ 4. Permanent accounts ____ 5. Adjusting entries ____ 6. Deferred revenues 1. E; 2. B; 3. A; 4. G; 5. H; 6. C

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-02 Accounting Cycle Topic: 04-04 Types of Adjustments Topic: 04-13 Closing the Books

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

138. The following trial balance of Lazy Corporation dated December 31, 20X1, developed by a clerk, contains errors.

Trial Balance Accounts Cash Trade receivables Machine Accumulated depreciation, machine Trade payables Share capital Retained earnings Totals

Debits

Credits $4,700 $3,500 8,300 500 3,000 10,000 3,000 $16,500

$16,500

Prepare a corrected Trial Balance.

Trial Balance Accounts Cash Trade receivables Machine Accumulated depreciation, machine Trade payables Share capital Retained earnings Totals

Debits

Credits

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Please review the following information:

Trial Balance Accounts Cash Trade receivables Machine Accumulated depreciation, machine Trade payables Share capital Retained earnings Totals

Debits

Credits $4,700 3,500 8,300 $500

$16,500

3,000 10,000 3,000 $16,500

Accessibility: Keyboard Navigation Blooms: Create Difficulty: Medium Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-09 Preparing Financial Statements

139. Is the adjusted trial balance a financial statement? Explain why or why not. No, the adjusted trial balance is not a financial statement. It is an internal working paper that lists all accounts with their balances to provide a check on the equality of debits and credits. It is an aid in the preparation of financial statements (income statement, statement of changes in equity, and statement of financial position).

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Easy Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-01 Adjusting Revenues and Expenses

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

140. Ten independent transactions for Scooter Corporation are listed below. A list of accounts used to record the economic effects of transactions in terms of the fundamental accounting model is given below. You are to indicate the accounts to be debited and credited for each transaction by entering the appropriate letter in each blank.

A. Cash B. Trade Receivables C. Office Equipment D. Accumulated Depreciation E. Trade Payables F. Notes Payable

ACCOUNTS G. Dividends Declared H. Share Capital I. Services Revenue J. Operating Expenses K. Interest Expense L. Retained Earnings

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Transaction 1. Purchased office equipment for cash 2. Issued shares for cash 3. Recorded depreciation expense on the office equipment 4. Borrowed cash from the bank on a note payable 5. Provided services on credit 6. Paid operating expenses with cash 7. Provided services for cash 8. Paid interest on notes payable 9. Incurred operating expenses, but cash has not been paid 10. Declared and paid cash dividends to shareholders

Debit

Please review the following information:

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Credit

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Transaction 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Debit C A J A B J A K J G or L

Credit A H D F I A I A E A

141. Explain why interest is not recorded on the day a business takes out a loan. A bank loan and its associated interest are tracked separately in the books. The loan itself is a liability until it is paid back. Interest is an expense

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

142. On December 1, 20X1, Pest Company collected $1,200 in advance for three months of rent on some office space. It was credited in full to unearned rent revenue. Assuming the accounting year ends December 31, give the adjusting entry required on December 31, 20X1. Please review the following information:

Dr Unearned rent revenue ($1,200 × 1/3) Cr Rent revenue

400 400

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

143. Below are two related transactions for Tweet Corporation. The annual accounting period ends December 31. For each date listed, give the required entry in journal format. a. October 1, 20X1--Tweet Corporation Borrowed $15,000 and signed a note providing for 10% interest. The principal and interest are due in one year (on September 30, 20X2). b. December 31, 20X1--end of the annual accounting period. (If no entry is required, explain why.) a. Cash Note payable

15,000 15,000

b. Interest Expense Interest payable

375 375

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

144. Model Company keeps a small inventory of supplies used for cleaning and maintenance purposes. On January 1, 20X1, the inventory of supplies on hand was $400. During the year, supplies purchased were debited to the supplies inventory account in the amount of $800. On December 31, 20X1, the inventory count of supplies in the storeroom was $100. Give the adjusting entry required at December 31, 20X1. Please review the following information:

Dr Supplies expense Cr Supplies inventory

1,100 1,100

145. On November 1, 20X1, Fuzzly Company leased some of its office space to Fox Company and immediately collected twelve months rent in advance of $24,000. Fuzzly debited cash and credited unearned rent revenue for $24,000. At the end of 20X1 (the end of the accounting period), give the adjusting entry Fuzzly should make in respect to the rent. What adjusting entry is required at the end of 20X2 for Fuzzly? Please review the following information: 20X1

Dr Unearned rent revenue ($1,200 × 1/3) Cr Rent revenue

4,000 4,000

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

20X2

Dr Unearned rent revenue Cr Rent revenue

12,000 12,000

146. On December 1, 2019, Dorian Company paid $1,500 rent for some office space which was debited in full to the prepaid rent account. The rent was for three months. Assuming Dorian's accounting year ends December 31, give the adjusting entry required on December 31, 2019. How much remains in the prepaid rent account at the start of the following year? Please review the following information:

Dr Rent expense ($1,500 × 1/3) Cr Prepaid rent

500 500

Jan 1, 2020 Prepaid rent:$1,000.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

147. Atlantic Company is completing the information processing cycle at the end of the annual accounting period, December 31, 20X1. Four adjusting entries must be made at this date to update the accounts. The following accounts, selected from Atlantic's chart of accounts, are to be used for this purpose. They are coded to the left for easy reference.

A. Office Supplies B. Trade Receivables C. Accumulated Depreciation D. Interest Receivable E. Notes Payable F. Interest Payable G. Property Tax Payable H. Unearned Rent I. Rent Payable

J. Office Supplies Expense K. Rent Expense L. Bad Debt Expense M. Depreciation Expense N. Interest Expense O. Sales Revenue P. Rent Revenue Q. Interest Revenue R. Equipment

You are to indicate the appropriate account code and amount for each required adjusting entry at December 31, 20X1

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Transaction

Debits Code

Credits Amount

A. On January 1, 20X1, equipment was purchased for $6,000. The equipment had an estimated useful life of five years with no residual value. It is depreciated using the straight-line method. Record depreciation. B. On November 1, 20X1, collected $1,800 rent revenue in advance for some warehouse space temporarily rented to a customer (credited in full to Unearned Rent). The rent was collected for November, December, and January. C. Office supplies

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Code

Amount

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

purchased during 20X1 amounted to $400 which was debited in full to office supplies during the year. The year-end inventory count of office supplies showed $100 of supplies on hand. The beginning inventory of office supplies was $150. D. On November 1, 20X1, the company signed a $6,000 interest bearing note payable. It was for one year and specified 12 percent annual interest payable at the maturity date of the note.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Please review the following information:

Transaction

Debits Code

A B C D

M H J N

Credits Amount $1,200 $1,200 $450 $120

Code C P A F

Amount $1,200 $1,200 $450 $120

A. [($6,000 - 0) ÷ 5] = $1,200. B. ($1,800 ´ 2/3) = $1,200. C. ($150 + $400 - $100) = $450. D. ($6,000 ´ 12% ´ 2/12) = $120.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

148. Settler Service is completing the information processing cycle at the end of its annual accounting period, December 31, 20X1. Four adjusting entries must be made to update the accounts. The following accounts, selected from the company's chart of accounts, are to be used for this purpose. They are coded to the left for easy reference.

A. Cash B. Notes Payable C. Interest Receivable D. Operational Assets E. Accumulated Depreciation F. Notes Payable G. Interest Payable H. Wages Payable

I. Unearned Rent J. Rent Expense K. Wage Expense L. Depreciation Expense M. Interest Expense N. Interest Revenue O. Rent Revenue P. Some other account, not listed

You are to indicate the appropriate account code and amount for each required adjusting entry at December 31, 20X1.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Transaction

Debits Code

Credits Amount

A. Unpaid wages at December 31, 20X1, of $2,400 have not been recorded. B. On October 1, 20X1, a note receivable was received from a customer. The note was for $5,000, one year, and was interest bearing at 14%. The interest is to be received at the maturity date of the note. C. Record depreciation of machinery. Cost of $91,000, residual value $3,000, tenyear life, straight-line method

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Code

Amount

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

D. On December 1, 20X1, collected rent revenue in advance of $1,800. This rent was for six months on some office space that temporarily rented to Sam White. The $1,800 was credited in full to unearned rent

Please review the following information:

Transaction

Debits Code

A B C D

K C L I

Credits Amount $2,400 $175 $8,800 $300

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Code H N E O

Amount $2,400 $175 $8,800 $300

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

A. All $2,400 B. ($5,000 ´ 14% ´ 31/2) = $175 C. [($91,000 - $3,000)/10] = $8,800 D.($1,800 ´ 1/6) = $300

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

149. Below are four transactions that were completed during 20X1 by Doby Company. The annual accounting period ends on December 31. Each transaction will require an adjusting entry at December 31, 20X1. You are to provide the 20X1 adjusting entries required for Doby Company. A. On July 1, 20X1, Doby Company paid a two-year insurance premium for a policy on its equipment. This transaction was recorded as follows: July 1, 20X1:

Prepaid insurance Cash

$1,000 $1,000

December 31, 20X1--Adjusting entry: B. On December 31, 20X1 a tenant renting some office space from Doby Company had not paid the rent of $500 for December. December 31, 20X1--Adjusting entry: C. On September 1, 20X1, Doby Company borrowed $3,000 cash and gave a one-year, 10 percent, note payable. The total interest of $300 is payable on the due date, August 31, 20X2. The note was recorded as follows: September 1, 20X1:

Cash Note payable

$3,000 $3,000

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

December 31, 20X1--Adjusting entry: D. Assume Doby Company publishes a magazine. On October 1, 20X1, the company collected $440 for subscriptions two years in advance. The $440 collection was recorded as follows: October 1, 20X1:

Cash Unearned subscription revenues

$440 440

December 31, 20X1--Adjusting entry: December 31, 20X1--Adjusting entry:

A. B. C. D.

Insurance expense Prepaid insurance $1,000 × 6/24 = $250 Rent revenue receivable Rent revenue Interest expense Interest payable $3,000 × 10% × 4/12 = $100 Unearned subscription revenues Subscription revenues $440 × 3/24 = $55

250 250 500 500 100 100 55 55

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

150. Four transactions are given below that were completed during 20X1 by Wren Company. The annual accounting period ends December 31. Each transaction requires an adjusting entry at December 31, 20X1. You are to provide the adjusting entries required for Wren Company. A. On December 31, 20X1, Wren Company owed employees $1,750 for wages that were earned by them during December and were not recorded. December 31, 20X1--Adjusting entry: B. During 20X1, Wren Company purchased office supplies that cost $500 which were placed in the supplies room for use as needed. The purchase was recorded as follows: 20X1:

Office supplies inventory Cash

$500 500

At the beginning of 20X1, the inventory of unused office supplies was $75. At the end of 20X1, a count showed unused office supplies in the supply room amounting to $100. December 31, 20X1--Adjusting entry: C. On December 1, 20X1, Wren Company rented some office space to another party. Wren collected $900 rent for the period December 1, 20X1, to March 1, 20X2. The rent collected was recorded as follows: December 1, 20X1:

Cash Unearned rent

$900 900

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

December 31, 20X1--Adjusting entry: D. On June 1, 20X1, Wren Company borrowed $2,000 cash on a one-year, 10% interestbearing, note payable. The interest is payable on the due date, May 31, 20X2. The note was recorded as follows: June 1, 20X1:

Cash Notes payable

$2,000 2,000

December 31, 20X1--Adjusting entry: December 31, 20X1--Adjusting entry:

A. B. C. D.

Wages expense Wages payable Office supplies expense Office supplies $75 + $500 - $100 = $475 Unearned rent Rent revenue $900 × 1/3 = $300 Interest expense Interest payable $2,000 × 10% × 7/12 = $117

1,750 1,750 475 475 300 300 117 117

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

151. Four transactions are given below that were completed during 20X1 by Lucky Company. The annual accounting period ends December 31. Each transaction will require an adjusting entry at December 31, 20X1. Provide the adjusting entry required. A. On January 1, 20X1, Lucky Company purchased office equipment that cost $8,000. The estimated life of the office equipment was five years ($500 residual value). December 31, 20X1--Adjusting entry: B. On June 1, 20X1, Lucky Company paid $12,600 for one year's rent beginning on that date. The rent payment was recorded as follows: June 1, 20X1:

Prepaid rent Cash

$12,600 $12,600

December 31, 20X1--Adjusting entry: C. Lucky Company purchased office supplies during the year that cost $700 and placed the supplies in a storeroom for use as needed. The purchase was recorded as follows: February 1, 20X1:

Office supplies inventory Cash

$700 700

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

At the end of 20X1, a count showed unused office supplies of $200 in the storeroom. There was no beginning inventory of supplies on hand. December 31, 20X1--Adjusting entry: D. On December 31, 20X1, Lucky Company owed employees for wages earned during December. Lucky Company pays employees every Friday for the Monday-Friday workweek. Salary amount for all employees combined is $1,000 per day. This year Dec 31 falls on a Monday. These wages had not been paid nor recorded. December 31, 20X1--Adjusting entry: Please review the following information:

B. C. D.

Depreciation Expense Accumulated depreciation [($8,000 $500)/5 years] = $1,500 Rent Expense Prepaid Rent ($12,600 × 7/12) = $7,350 Office Supplies Expense Office Supplies Wage Expense Wages payable

$1,500 $1,500 $7,350 $7,350 $500 $500 $1,000 $1,000

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

152. Below, to the left, are listed several different account titles that you have studied. Under each column for each cell you are to enter one capital letter which indicates for each account its normal characteristics. Use the letter code given

Type of Account A = Assets R = Revenue C = Contra N = Not Applicable

L = Liabilities E = Expenses SE = Shareholders' Equity

Closing Status C = Closed N = Not Closed

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Normal Balance D = Debit C = Credit

Financial Statement B = Balance Sheet I = Income Statement SE = Statement of Earnings N = None of the above

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Account Titles Ex. Cash 1. Dividends declared 2. Wages payable 3. Share capital 4. Rent expense 5. Retained earnings 6. Notes payable 7. Unearned revere 8. Dividends payable 9. Building 10. Accumulated depreciation 11. Trade receivable 12. Supplies inventory 13. Interest revenue 14. Interest expense 15. Service revenue 16. Depreciation expense

Type of Account A

Closing Status N

Typical Balance (before Closing) D

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Financial Statement(s) (on which reported) B

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Please review the following information:

Account Titles

1. Dividends declared 2. Wages payable 3. Share capital 4. Rent expense 5. Retained earnings 6. Notes payable 7. Unearned revere 8. Dividends payable 9. Building 10. Accumulated depreciation 11. Trade receivable 12. Supplies inventory 13. Interest revenue 14. Interest expense 15. Service revenue 16. Depreciation expense

Type of Account

Closing Status

Typical Balance (before Closing)

Financial Statement(s) (on which reported)

L SE E SE

N N C N

C C D C

SFP SFP, SE I SFP, SE

L L L

N N N

C C C

SFP SFP SFP

A C

N N

D C

SFP SFP

SFP

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

153. A list of the accounts of TIP Corporation is given below, followed by some selected transactions. Indicate the accounts that should be debited and credited for each transaction entry, adjusting entry, and closing entry by placing the appropriate account codes in the debit and credit columns provided.

Code A B C D E F G H

Account Cash Prepaid Insurance Trade Receivables

Code I J K

Service Trucks Accumulated Depreciation Trade Payables

L M

Notes Payable Unearned Service Revenue

O P

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Account Share Capital Retained Earnings Dividends Declared Service Revenues Expenses Income Tax Payable Income Summary Rent Payable

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Transactions

Accounts Debit

Ex.

7. 8.

Purchased a D service truck, paid 1/2 cash and gave a 90-day interestbearing note for the balance An investor contributed $55,000 cash to the business and received 5,000 shares Paid $600 for a two-year premium on the insurance policy covering the trucks Borrowed $10,000 from a local bank by signing a oneyear, interestbearing note Service revenues earned; Cash collected $40,000; on credit: $12,000 One month's rent on the building was paid at year end Collected $1,000 in advance for a service to be provided next year Expenses incurred: paid cash $28,000; On credit: $7,000 Declared and paid a cash dividend of $2,000

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Credit A, G

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

9. 10.

11.

12.

Depreciation of $1,500 on the truck must be recorded Expired insurance for one full year must be recorded (see above) Revenue accounts must be closed at the end of the period Expense accounts must be closed at the end of the period

Please review the following information:

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Transactions

Accounts Debit

Ex.

4. 5. 6. 7. 8. 9. 10. 11.

Purchased a service truck, paid 1/2 cash and gave a 90-day interestbearing note for the balance An investor contributed $55,000 cash to the business and received 5,000 shares Paid $600 for a two-year premium on the insurance policy covering the trucks Borrowed $10,000 from a local bank by signing a one-year, interestbearing note Service revenues earned; Cash collected $40,000; on credit: $12,000 One month's rent on the building was paid at year end Collected $1,000 in advance for a service to be provided next year Expenses incurred: paid cash $28,000; On credit: $7,000 Declared and paid a cash dividend of $2,000 Depreciation of $1,500 on the truck must be recorded Expired insurance for one full year must be recorded (see above) Revenue accounts must be closed at the end of the period

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Credit

A, G

A, C

A, F

J or K

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

12.

Expense accounts must be closed at the end of the period

154. On December 31, 20X, Madison Company prepared an income statement and a statement of financial position. In making the adjusting entries at year-end, Madison failed to record the adjusting entry for wages earned by employees, but not yet paid, amounting to 43,000 for the last four days of the year. The income statement reported profit of $21,000. The statement of financial position reported total assets, $82,000; total liabilities, $30,000; and shareholders' equity, $52,000. Complete the following tabulation to show the correct amounts for the financial statements.

Item Balances Reported Correction for Wages Corrected Balances

Net Income $21,000

Assets $82,000

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Liabilities

Shareholders' Equity $30,000 $52,000

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Please review the following information:

Item Balances Reported Correction for Wages Corrected Balances

Net Income

Assets

Liabilities

$21,000

$82,000

$30,000

Shareholders' Equity $52,000

($4,000)

-0-

$4,000

($4,000)

$17,000

$82,000

$34,000

$48,000

155. Allen Corporation is completing the accounting information processing cycle at the end of the fiscal year, June 30, 20X2. The following trial balances are on Allen's worksheet at June 30, 20X2.

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Account Titles Cash Trade Receivables Prepaid Insurance Equipment Accumulated Depreciation Wages Payable Share Capital Retained Earnings Service Revenues Wage Expense Depreciation Expense Insurance Expense Totals

June 30, 20X2 Unadjusted Trial Balance Debit $13,000 1,500

Credit

600

Adjusted Trial Balance Debit $13,000 1,800

Credit

200

60,000

60,000 $16,500

$22,000 100

25,000 11,600

38,000

38,300

16,000

16,100 5,500 400

91,100

97,000

Reconstruct the adjusting entries and give a brief explanation of each. Please review the following information:

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97,000

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Debit a.

Trade receivables Services Revenues (Services were provided to customers during the year which has not been collected or recorded) Insurance Expense Prepaid Insurance (Insurance expired during the year) Depreciation Expense Accumulated depreciation (Depreciation on equipment during 20X2) Wages Wages Payable (Wages earned during 20X2 but not yet recorded paid)

Credit 300 300

400 400 5,500 5,500

300 300

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 04-01 Explain the purpose of adjusting entries and analyze the adjustments necessary at the end of the period to update revenues and expenses and related statement of financial position accounts. Topic: 04-04 Types of Adjustments Topic: 04-05 Adjustment Process

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

156. The comparative statements of financial positions of True North Company for December 31, 20X1 and 20X2, reported the following selected amounts:

20X1 Assets: Office supplies inventory Liabilities: Unearned rent revenue

20X2 $2,000

$800

11,000

10,500

The 20X2 income statement reported the following:

Revenues: Rent revenue Interest revenue Expenses: Office supplies expense

$12,000 $1,000 15,000

A. The total amount of office supplies purchased during 20X2 was $___________. B. The total amount of rent collected during 20X2 was $____________. C. In what section of the statement of cash flows would the payments for office supplies appear? D. In what section of the statement of cash flows would the collection for rents appear? A. $800 - $2,000 + $15,000 = $13,800 B. $10,500 - $11,000 + $12,000 = $11,500 C. Operating activities D. Operating activities

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

157. Prepare adjusting entries for the following transactions. Omit explanations. 1. Depreciation on equipment is $1,050. 2. Interest incurred and owed on a loan but not paid or recorded is $275. 3. There was a beginning balance of supplies of $120 and the company purchased $400 of office supplies during the period. At the end of the year $70 of supplies were on hand. 4. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $400 had expired. 5. Accrued salaries at year end were $1,100. 1. Depreciation Expense Accumulated Depreciation Equipment

1,050 1,050

2. Interest Expense Interest Payable

275 275

3. Supplies Expense Supplies ($120 + $400 - 70)

450 450

4. Rent Expense Prepaid Rent

400 400

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

5. Salaries Expense Salaries Payable

1,100 1,100

158. Prepare adjusting entries for the following transactions. 1. Interest accrued on notes receivable is $270. 2. Property taxes owing but not paid or recorded amount to $700. 3. Legal service revenues of $3,000 were collected in advance. By year end, $600 was earned. 4. Prepaid insurance had a $400 debit balance prior to adjustment. By year end, 40% was still unexpired. 5. Salaries owing at year end but not yet paid or recorded amounted to $950. 6. Had $1,000 worth of supplies at the beginning of the year and still have $200 of supplies left. 1. Interest Receivable Interest Revenue

270 270

2. Property Taxes Expense Property Taxes Payable

700 700

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

3. Unearned Legal Service Revenues Legal Service Revenues

600 600

4. Interest Expense Prepaid Insurance

240 240

5. Salaries Expense Salaries Payable

950 950

6. Supplies expense Supplies

800 800

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

159. Prepare adjusting entries for the following transactions. 1. Accrued interest on notes receivable is $95. 2. Unearned revenues earned totals $2,000. 3. Four years rent, totaling $60,000, was paid in advance at the beginning of the year. 4. Services totaling $2,100 had been performed but not yet billed at the end of the year. 5. Equipment purchased two years ago for $18,000 had an estimated useful life of 4 years. 6. The balance in the Supplies account was $690. By year end, only $100 in supplies remained. 7. Salaries owed to employees at the end of the year total $1,000. 1. Interest Receivable Interest Revenue

95 95

2. Unearned Revenues Revenues

2,000 2,000

3. Rent Expense (60,000 / 4) Prepaid Rent

15,000 15,000

4. Accounts Receivable Services Revenue

2,100 2,100

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

5. Depreciation Expense Equipment (18,000 / 4) Accumulated Depreciation Equipment

4,500 4,500

6. Supplies Expense Supplies

590 590

7. Salaries Expense Salaries Payable

1,000 1,000

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

160. One part of an adjusting entry is given below. Indicate the account title for the other part of the entry. 1. Unearned Service Revenue is debited. 2. Prepaid Rent is credited. 3. Accounts Receivable is debited. 4. Depreciation Expense is debited. 5. Utilities Expense is debited. 6. Interest Payable is credited. 7. Service Revenue is credited (give two possible debit accounts). 8. Interest Receivable is debited. Please review the following information:

1. Service Revenue 2. Rent Expense 3. Service Revenue 4. Accumulated Depreciation

5. Utilities Payable 6. Interest Expense 7. Accounts Receivable or Unearned Service Revenue 8. Interest Revenue

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

161. On June 1, 20X1, Global Services, Inc., was started with $50,000 invested by the owners as share capital. On June 30, the accounting records contained the following amounts:

Trade Payables Trade Receivables Cash Share Capital Consulting Fees Earned Dividends Declared

$100 3,900 25,100 50,000 8,400

Office Supplies Rent Expense Salary Expense Supplies Expense Telephone Expense 2,100 Office Equipment

$500 1,300 1,000 100 500 24,000

Prepare a statement of changes in equity for June, the first month of operation. Ignore income taxes. Global Services Inc. Statement of Shareholders' Equity For the Month Ended June 30, 20X1

Share Capital Beginning Balance, 6/1 Shares issued Profit Dividends Declared Ending Balance, 6/30

-0-

Retained Earnings -0-

50,000 $50,000

5,500 (2,100) $3,400

Total Equity -050,000 5,500 (2,100) $53,400

Accessibility: Keyboard Navigation Blooms: Create Difficulty: Medium Learning Objective: 04-02 Prepare a statement of earnings with earnings per share, a statement of changes in equity, and a statement of financial position. Topic: 04-11 Statement of Changes in Equity

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

162. A. Explain how the income statement relates to the statement of changes in equity B. Explain how the statement of changes in equity relates to the statement of financial position. C. Explain how the statement of cash flows relates to the statement of financial position. A. Profit from the income statement appears in the statement of changes in equity as an increase to retained earnings. B. The ending balance for share capital and retained earnings appear on the statement of financial position in the shareholders' equity section. C. The bottom line for the ending cash balance on the statement of cash flows is the same as the cash account balance on the statement of financial position.

163. Healthy Living magazine has received cash subscriptions on April 1, 20X1, in the amount of $3,600,000 for the next three years. Their year end is December 31, 20X1. Magazine delivery occurs monthly and started on April 1, 20X1. These were the only subscription sales for the year. Answer the following questions: a. What amount of cash should be reported for the year on the statement of cash flows? b. What amount of subscriptions revenue should be reported on the statement of earnings? c. What amount would be reported as unearned subscriptions revenue on the statement of financial position as of December 31, 20X1? d. What amount would be reported as unearned subscription revenue on the statement of financial positions of December 31, 20X2? (a) $3,600,000 (b) $900,000 (c) $2,700,000 d)1,500,000

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

164. The following statement of financial position was prepared by Bob, the recently hired and inexperienced bookkeeper for Beaumont Developments Inc.

Cash 1 Accounts receivable 2 Inventories 3 Investments 4 Property, plant & equipment (net) 5 Patents 6

Beaumont Developments Inc Statement of Financial Position as of December 31, 20X7 $40,000 Accounts payable 7 52,200 Long-term liabilities 8 57,000 Shareholders' equity 9 76,300 136,000 32,000 $393,500

$15,000 170,000 208,500

$393,500

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

The following additional information is provided: 1. Cash includes the cash value of a life insurance policy $9,400, and Bob found a utilities bill for $1,500 in his in-box, so he deducted the amount from cash. 2. The accounts receivable balance includes an amount of $2,300 owing from a customer who has since gone out of business. The company does not expect to receive any further payments on this debt. The company writes off bad debts as they occur. Bob also included the account prepaid expenses with accounts receivable on the statement, as explained in point 6 below. 3. Inventories do not include goods costing $5,000 held on consignment at Hardy Home Emporium. Receivables and sales of $5,000 were recorded for these goods. 4. Investments include investments in trading shares $4,000 and long-term bonds $43,300, a patent $32,000 and franchises $9,000. The company accounts for unrealized gains and losses on investments in other comprehensive income. The patent is for a manufacturing process that is now obsolete and is no longer used. 5. Property plant and equipment (PPE) has a remaining useful life of eight years, and includes a new machine purchased during the year for $26,000, which has a useful life of 10 years. Bob does not know what "net" means, but he used the same accounts and followed the same format as last year to prepare the statement. Accumulated depreciation has the same balance as last year, $68,000. The company uses the straight-line method of depreciation. Also, included in PPE are a patent with an original cost of $32,000, which was obtained twelve years ago and is now obsolete, and franchises in the amount of $9,000. 6. Insurance premiums of $18,000 were paid during the year. The insurance policy runs from April 1 to March 31 of the following year. Last year the premium paid was $14,880. The previous bookkeeper had debited the account called prepaid insurance in the amount of $3,720. Bob was not confident this was correct, so he charged this year's premium as insurance expense and he included the prepaid expense amount of $3,720 in accounts receivable. 7. Accounts payable includes the account wages payable for $2,300. The amount has not changed since last year. The last pay in the current year was on December 28 for hours worked up to that date. The company incurs wage expenses of $500 per day. 8. Long-term liabilities include a bank loan of $60,000 and a mortgage payable of $110,000. 9. Shareholder's equity consists of the following items:

Common shares outstanding (20,000 shares) Accumulated other comprehensive income Retained earnings

$40,000 $11,600 $156,900

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Required: After making all necessary adjustments, prepare a classified Statement of Financial Position in good form. What is the effect of your adjustments on earnings per share? Beaumont Developments Inc. Statement of Financial Position As at December 31 20X7 Current assets Current liabilities 1 Cash $32,100 Accounts payable 6 Trading securities 4,000 Salaries payable 7 Accounts receivable 2 41,180 Total current liabilities 3 Inventories 59,280 4 Prepaid insurance 4,720 Long-term liabilities Total current assets 141,280 Bank loan Shareholder loan Investments Long-term securities 43,300 Cash value - life insurance 9,400 Shareholder's equity 52,700 Common shares Accumulated other Property, plant, and comprehensive income equipment Equipment 5 163,000 Retained earnings Less accumulated depreciation 87,725 75,275 Intangible assets Total liabilities & shareholder's equity Franchises 9,000 Total assets

$278,255

4-99

$14,200 1,500 15,700

60,000 110,000 170,000

4,000 11,600 76,955 92,555 $278,255

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

($40,000 - $9,400 + $1,500) = $32,100 ($52,200 - $2,300 - $5,000 - $3,720) = $41,180 ($54,280 + $5,000) = $59,280 ($14,880/12 ´ 3 months) + ($18,000/12 ´ 9 months) = $4,720 PPE ($136,000 + $68,000 - $9,000 - $32,000) = $163,000 Accumulated depreciation ($163,000 - $26,000)/8 years + $26,000/10 years = $19,725 + beg balance $68,000 = $87,725 ($15,000 - $2,300 + $1,500) = $14,200 $500 ´ 3 days = $1,500 b. Effect of adjustments on EPS: Retained earnings before adjustments Retained earnings after adjustments Total impact of adjustments Impact per share (20,000 shares)

156,900 76,955 79,945 (4.00)

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 04-03 Compute and interpret the net profit margin ratio and the return on equity. Topic: 04-12 Statement of Financial Position

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

165. The following statement of earnings was reported for Cotrell Inc. for the first year of operations ending December 31, 20X2, reported in thousands of dollars:

Sales revenue Expenses: Cost of Sales Salaries and Wages Rent Utilities Miscellaneous Total Expenses Income before taxes Income tax expense Profit

$10,600 $4,200 2,100 1,400 800 1,100 9,600 1,000 250 $750

Calculate the following: (a) net profit margin (b) earnings per share if there are 100,000 shares outstanding (a) 7.1%, (calculated by dividing net income $750 by net sales $10,600), (b) $7.50 per share (calculated by taking net income $750,000 divided by common shares outstanding 100,000)

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

166. Discuss the similarities and differences between closing entries and adjusting entries Both adjusting entries and closing entries are done at the end of an accounting period. Both are required to ensure that the accounts are up to date. Difference is that adjusting entries deal with balance sheet and income statement accounts and these accounts will remain postadjustment. After closing entries are done only permanent accounts remain open as temporary accounts have been reset to zero.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

167. Alex the bookkeeper finds the depreciation expense account for equipment in a postclosing trial balance. Is this indicative of an error? Why or why not? Yes, there is an error. The post-closing trial balance sheet should not have any temporary or income statement accounts as these should have been reset to zero in the closing process. What you should expect to see on the post-closing trial balance is the accumulated depreciation account associated with equipment.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-15 Post-closing Trial Balance

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

168. The adjusted trial balance of Ward Company at the end of the accounting year, December 31, 20X2, showed the following:

Account Titles Cash Machinery Accumulated Depreciation Trade Payables Share Capital Retained Earnings Service Revenue Interest Expense Operating Expenses Depreciation Expense Dividends declared and paid Totals

Adjusted Trial Balance Debits $20,000 90,000

Credits 16,000 7,000 20,000 59,000 40,000

4,000 17,000 8,000 3,000 $142,000

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$142,000

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

1) Give all the required closing entries for Ward Company at December 31, 20X2. (You need not use the Income Summary account). 2) The 20X2 ending balance in retained earnings was $ ________ 1.

a. Services Revenue Retained Earnings b. Retained Earnings Operating Expenses Depreciation Expense Interest Expense c. Retained Earnings Dividends Declared and paid

Debits $40,000

Credits $40,000

$29,000 $17,000 $8,000 $4,000 $3,000 $3,000

2. $59,000 + $11,000 - $3,000 = $67,000 (Balance of retained earnings at the end of 20X2)

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

169. Air Cargo Company recorded the following adjusting entries at the end of the accounting year, December 31, 20X2:

Wages expense Wages payable Interest receivable Interest revenue

Debits 2,000

Credits 2,000

1,000 1,000

Before these adjusting entries were recorded, a partial unadjusted trial balance reflected the following:

Accounts Dividends declared Service revenue Operating expenses Wage expense Wages payable Interest receivable Interest revenue

Partial Unadjusted Trial Balance Debits Credits 1,000 80,000 52,000 28,000 -0-09,000

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Give the closing entries for Air Cargo Company at December 31, 20X2. (You need not use the Income Summary account). Please review the following information:

a. Service Revenue Interest Revenue Retained Earnings b. Retained Earnings Operating Expenses Wages Expense c. Retained Earnings Dividends Declared

Debits 80,000 10,000

Credits 90,000

82,000 52,000 30,000 1,000 1,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-13 Closing the Books

4-106

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

170. At December 31, 20X1, the following adjusting entries were recorded in the accounts of Speedy auto glass Company:

Debit 2,000

Interest receivable Interest payable Interest revenue Wages expense Wages payable

Credit 500 2,000

10,000 10,000

There were no other accrued receivables or payables on Speedy's books in 20X1. The balances in the following accounts immediately after the closing entries were posted would be:

Transactions 1. 2. 3. 4. 5.

Accounts Debit $ $ $ $ $

Interest Receivable Interest Payable Interest Revenue Wages Expense Wages Payable

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Credit $ $ $ $ $

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Please review the following information:

Transactions 1. 2. 3. 4. 5.

Accounts Debit $2,000

Interest Receivable Interest Payable Interest Revenue Wages Expense Wages Payable

Credit $500 $0

$0 $10,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 04-04 Explain the closing process at the end of the period. Topic: 04-15 Post-closing Trial Balance

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Chapter 05 - Reporting and Interpreting Cash Flows

Chapter 05 Reporting and Interpreting Cash Flows

True / False Questions 1. The income statement, statement of financial position and statement of cash flows all are prepared on the accrual basis. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-01 Classification of Cash Flows

2. Both the statement of cash flows and the statement of financial position report on the sources of the changes in the cash of the business. FALSE

3. For external reporting, a company must prepare an income statement, but the statement of cash flows is optional. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-06 Relationships to the Statement of Financial Position and the Statement of Earnings

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Chapter 05 - Reporting and Interpreting Cash Flows

4. The statement of cash flows is dated exactly like the income statement but unlike the statement of financial position. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-06 Relationships to the Statement of Financial Position and the Statement of Earnings

5. Short-term investments in marketable equity securities are considered the equivalent of cash (i.e., they are combined with cash) in preparing the statement of cash flows. FALSE

6. When the statement of cash flows is prepared in conformity with IFRS there is only one acceptable way to measure and report cash flows from operating activities. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

7. The primary objective of the statement of cash flows is to provide information about a company's cash receipts and cash payments during an accounting period. TRUE

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Chapter 05 - Reporting and Interpreting Cash Flows

8. When a cash dividend is paid, the cash outflow is classified as an operating activity. FALSE

9. Cash equivalents are defined as short-term, highly liquid investments that are readily convertible into known amounts of cash and are so near their maturity that there is insignificant risk of changes in their value due to interest rate changes. TRUE

10. The statement of cash flows is the only financial statement not prepared on the accrual basis of accounting. TRUE

11. Only investments with original maturities of less than three months at the date of purchase qualify as cash equivalents. TRUE

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Chapter 05 - Reporting and Interpreting Cash Flows

12. Cash collected from customers is a cash flow from a financing activity. FALSE

13. The amortization of a patent is treated in a similar manner to depreciation of a building when preparing the operating activities section of the statement of cash flows using the indirect method. TRUE

14. The payment to shareholders for repurchase of treasury shares is a cash flow from a financing activity. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-03 Cash Flows from Investing Activities

15. The payment of interest on a note payable is a cash flow from an operating activity. TRUE

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Chapter 05 - Reporting and Interpreting Cash Flows

16. Dividends collected from a long-term investment are cash flows from investing activities. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-02 Cash Flows from Operating Activities Topic: 05-03 Cash Flows from Investing Activities

17. Collection of principal on a note receivable is a cash flow from investing activities. TRUE

18. Loans to other companies (notes receivable) are cash flows from financing activities. FALSE

19. The date in the heading of a statement of cash flows should say, "At December 31, 20X1," rather than "For the Year Ended December 31, 20X1." FALSE

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Chapter 05 - Reporting and Interpreting Cash Flows

20. Very few companies use the direct method for disclosing their cash flows from operating activities. TRUE

21. Companies prefer the indirect method because it reveals less information to competitors. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-07 Reporting and Interpreting Cash Flows from Operating Activities

22. Depreciation expense is a non-cash expense, so it is not part of the statement of cash flows. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-07 Reporting and Interpreting Cash Flows from Operating Activities

23. The net increase (or decrease) in cash that is reported on the statement of cash flows should be the same as the change in the balance of the cash account for the two most recent years on the comparative statements of financial position. TRUE

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Chapter 05 - Reporting and Interpreting Cash Flows

24. The direct and indirect methods refer only to the operating section of the statement of cash flows. TRUE

25. Depreciation expense does not cause a cash outflow for the current period; therefore, it should never be shown on the statement of cash flows. FALSE

26. Any item that appears on the statement of earnings would be considered either a cash inflow or cash outflow from operating activities. FALSE

27. Under the indirect method, non cash expenses are added to net earnings. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

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Chapter 05 - Reporting and Interpreting Cash Flows

28. Operating activities include the cash effects of transactions that Evaluation revenues and expenses. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

29. The quality of earnings ratio (Cash Flow from Operating Activities ÷ Net earnings) measures the portion of profit that was generated in cash. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-03 Analyze and interpret the quality of earnings ratio. Topic: 05-16 Interpreting Cash Flows from Operating Activities

30. A higher quality of earnings ratio indicates that it is less likely that the company is using aggressive revenue recognition policies to increase profit. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 05-03 Analyze and interpret the quality of earnings ratio. Topic: 05-16 Interpreting Cash Flows from Operating Activities

31. Cash flow from investing activities is considered the most important category on the cash flow statement because it is considered the best measure of expected earnings. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 05-04 Report and interpret cash flows from investing activities. Topic: 05-18 Reporting Cash Flows from Investing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

32. Capital expenditures are unnecessary for service firms. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-04 Report and interpret cash flows from investing activities. Topic: 05-18 Reporting Cash Flows from Investing Activities

33. Capital expenditures are a normal use of cash for the typical investing activity. TRUE

34. Acquisitions and sales of long-lived assets are examples of investing cash flows. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-04 Report and interpret cash flows from investing activities. Topic: 05-19 Property, Plant, and Equipment—Net

35. Investing activities reported on the statement of cash flows include cash payments to acquire property, plant, and equipment, and short-term and long-term investments. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-04 Report and interpret cash flows from investing activities. Topic: 05-18 Reporting Cash Flows from Investing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

36. Billton Company purchased a machine in the current year for $18,000. Payment included cash, $5,000; a one-year note payable, $5,000; and a 2-year, $8,000 note payable. This transaction decreases cash by $5,000 in the current year. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-04 Report and interpret cash flows from investing activities. Topic: 05-19 Property, Plant, and Equipment—Net

37. When using the indirect method, a loss on the sale of equipment should be subtracted from profit to derive cash flows from operating activities. FALSE

38. The capital expenditures ratio (Cash Flow from Operating Activities ÷ Cash Paid for Property, Plant, and Equipment) reflects the portion of purchases of property, plant, and equipment financed from operating activities without the need for outside debt or equity financing or the sale of other investments or other long-term assets. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-05 Analyze and interpret the capital expenditures ratio. Topic: 05-20 Interpreting Cash Flows from Investing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

39. A low capital expenditures ratio indicates a higher need to obtain outside financing to expand property, plant, and equipment assets. TRUE

40. The acquisition of a building by issuing a mortgage note payable would be considered both an investing activity and financing activity that do not affect cash and would be reported in the notes to the financial statements. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-06 Report and interpret cash flows from financing activities. Topic: 05-22 Reporting Cash Flows from Financing Activities

41. In preparing statement of cash flows, an increase in the common shares account during a period would be an investing activity. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-06 Report and interpret cash flows from financing activities. Topic: 05-22 Reporting Cash Flows from Financing Activities

42. Proceeds from borrowing as well as issuing the firm's own equity securities are examples of financing cash inflows TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-06 Report and interpret cash flows from financing activities. Topic: 05-22 Reporting Cash Flows from Financing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

43. Wish Corporation acquired a computer for $15,000 and paid for it in full by issuing 1,000 shares of its own common shares, par $10 (current market price $15 share). This transaction should not be reported on the statement of cash flows because cash was neither paid out nor received. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-07 Explain the format of the statement of cash flows and additional cash flow disclosures. Topic: 05-31 Supplemental Cash Flow Information

44. A transaction that does not cause an inflow or outflow of cash should be reported on the statement of cash flows only if it is an adjustment to convert accrual profit to the cash basis. FALSE

45. The purchase of a piece of equipment in exchange for common shares must be reported in the notes to the financial statements. TRUE

46. While creditors rely heavily on cash flow information, investors can rely exclusively on earnings. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-07 Explain the format of the statement of cash flows and additional cash flow disclosures. Topic: 05-31 Supplemental Cash Flow Information

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Chapter 05 - Reporting and Interpreting Cash Flows

47. It is possible for a firm to be highly profitable and go bankrupt. TRUE

48. Expenses reported on the income statement for 20X1 (the first year of operations), totaled $60,000, which included depreciation expense of $8,000, and wages payable increased by $3,000 by the end of 20X1. Therefore, the 20X1 cash outflow for expenses was $71,000. FALSE Calculation: $60,000 - $8,000 - $3,000 = $49,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-33 Appendix 5B: Reporting Cash Flows from Operating Activities—Direct Method

49. The sales revenue reported on the income statement for 20X1 totaled $96,000, of which one third was on credit. The 20X1 beginning balance of trade receivables was zero and the 20X1 ending balance reported on the statement of financial position was $10,000; therefore, the 20X1 cash inflow from customer sales was $86,000. TRUE

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Chapter 05 - Reporting and Interpreting Cash Flows

Multiple Choice Questions 50. Which one of the following items is not generally used in preparing a statement of cash flows? A. Comparative statements of financial position B. Current Statement of earnings C. Additional information D. Adjusted trial balance

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-01 Classification of Cash Flows

51. The cash flow statement will not report the A. amount of cheques outstanding at the end of the period. B. sources of cash in the current period. C. uses of cash in the current period. D. change in the cash balance for the current period.

52. One of the primary purposes of the cash flow statement is to A. determine the company's annual profit after taxes B. inform users of dividends declared during the year C. segregate operating revenues from non-operating revenues D. determine if the company is adequately managing accounts receivable and inventory

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Chapter 05 - Reporting and Interpreting Cash Flows

53. Which of the following transactions is not a direct source of cash? A. Disposal of inventory for cash. B. Bank Loan. C. Issuance of shares for cash. D. Sale of services on credit.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-01 Classification of Cash Flows

54. Which of the following transactions is not a direct use of cash? A. Acquisition of inventory for cash. B. Purchase of treasury shares with cash. C. Exchange of bonds payable for land. D. Cash dividend paid.

55. How should the statement of cash flows be dated? A. December 31, 20X. B. At Year-End December 31, 20X. C. For the Year Ended December 31, 20X. D. At December 31, 20X.

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Chapter 05 - Reporting and Interpreting Cash Flows

56. If a company reports a net loss, it: A. will not be able to pay cash dividends. B. may still have a net increase in cash. C. will not be able to get a loan. D. should not make capital expenditures.

57. Which of the following is a cash equivalent? A. A short-term bank loan B. A demand note receivable from another company C. Government of Canada 180-day treasury bill D. A note payable to a supplier

58. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is A. cash flows from investing activities. B. cash flows from financing activities. C. cash flows from operating activities. D. usually different from year to year.

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Chapter 05 - Reporting and Interpreting Cash Flows

59. The information in statement of cash flows should help investors and creditors evaluate: A. the company's ability to generate past cash flows. B. the company's ability to receive dividends and meet shareholder obligations C. the reasons for the difference between net liabilities and net cash provided or used by operating activities. D. the investing and financing transactions during the period.

60. Investing activities include A. collecting the principal on loans made. B. obtaining cash from creditors. C. obtaining capital from owners. D. repaying money previously borrowed.

61. Financing activities involve A. lending money. B. acquiring investments. C. issuing debt. D. acquiring long-lived assets.

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Chapter 05 - Reporting and Interpreting Cash Flows

62. Which of the following transactions does not affect cash during a period? A. Write-off of an uncollectible account B. Collection of an accounts receivable C. Issuance of common shares D. Redemption of bonds

63. Which of the following is a cash inflow from financing activities? A. Proceeds from selling investments in equity securities of another company. B. Proceeds from selling equipment. C. Proceeds from issuance of bonds payable. D. Receipt of interest payments.

64. For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and which of the following is correct? A. It must be identified as a cash equivalent on the statement of earnings. B. It must mature within 4 months. C. The investment must have a known foreign exchange rate. D. Must be sufficiently close to its maturity date so that its market value is relatively insensitive to interest rate changes.

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Chapter 05 - Reporting and Interpreting Cash Flows

65. A company has incurred some routine maintenance costs. If they decide to capitalize these costs instead of expensing them, what would be the effect on cash from operations and cash from investing activities in that period? A. Cash from operations would increase; cash from investing would increase. B. Cash from operations would increase; cash from investing would decrease. C. Cash from operations would decrease; cash from investing would increase. D. Cash from operations would decrease; cash from investing would decrease.

66. Under the indirect approach adjustments must be made to net income in the operations section for all of the following items, except A. depreciation. B. gain on the sale of equipment. C. loss on the sale of land. D. proceeds for the sale of temporary investments.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

67. Under the indirect method, a gain on sale of equipment is reported as: A. an increase to cash provided by investing activities. B. a decrease to net earnings. C. an increase to revenues. D. a decrease to equipment purchases.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

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Chapter 05 - Reporting and Interpreting Cash Flows

68. Under the indirect method, an increase in trade receivables is reported on the statement of cash flows as: A. an increase to cash. B. a decrease to cash. C. an increase to sales. D. a decrease to sales.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-10 Changes in Accounts Receivable

69. The indirect method starts with net earnings and converts them to net cash provided by operating activities. This means that: A. the indirect method starts with net earnings and adds back all the expenses relating to operating activities. B. the indirect method calculates net earnings as the difference between net assets and net liabilities. C. the indirect method adjusts net earnings, for items that affected reported net earnings but did not affect cash. D. the indirect method adjusts net earnings for contra account balances.

70. The differences in the indirect method and the direct method of the statement of cash flows are evident in which section? A. Operating activities B. Investing activities C. Financing activities D. Cash reconciliation section

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Chapter 05 - Reporting and Interpreting Cash Flows

71. Toga Corporation reported profit of $50,000 for the year. During the year, trade receivables increased by $8,000, trade payables decreased by $4,000 and depreciation expense of $6,000 was recorded. Net cash provided by operating activities for the year, using the indirect method, is A. $54,000. B. $44,000. C. $56,000. D. $50,000. Calculation: $50,000 - $8,000 - $4,000 + $6,000 = $44,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

72. Winn Company's 20X2 income statement reported total revenues, $110,000, and total expenses (including $10,000 depreciation), $70,000 (i.e., a profit of $40,000). The 20X2 balance sheet reported the following: trade receivables--beginning balance, $16,000 and ending balance, $14,000; wages payable--beginning balance, $2,000 and ending balance, $1,500. Therefore, based only on this information, the 20X2 net cash inflow from operating activities was which of the following? A. $48,500. B. $50,000. C. $51,500. D. $59,500. Calculation: $40,000 + $10,000 + $2,000 - $500 = $51,500.

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Chapter 05 - Reporting and Interpreting Cash Flows

73. Jackson Company gathered the following data to prepare its 20X7 statement of cash flows:

Profit Depreciation expense Trade receivables decrease Wages payable increase Amortization of patent Income tax payable decrease

$40,000 5,000 3,000 4,000 1,000 2,000

Based only on the above data, the net cash inflow from operating activities during 20X7 was which of the following? A. $43,000. B. $45,000. C. $51,000. D. $53,000. Calculation: $40,000 + $5,000 + $3,000 + $4,000 + $1,000 - $2,000 = $51,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

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Chapter 05 - Reporting and Interpreting Cash Flows

74. Matlock Company reported total sales revenue of $55,000 and total expenses amounting to $45,000 (i.e., profit of $10,000) on its income statement for the year ended December 31, 20X2. During 20X2, trade receivables decreased by $4,000, merchandise inventory decreased by $6,000, trade payables increased by $2,000 and depreciation of $8,000 was recorded. Therefore, based only on this information, the net cash flow from operating activities for 20X2 would be which of the following? A. $10,000. B. $18,000. C. $19,000. D. $30,000. Calculation: $10,000 + $4,000 + $6,000 + $2,000 + $8,000 = $30,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

75. Allen Company reported total sales revenue of $150,000 and total expenses of $152,000 (i.e., a net loss of $2,000) for the year ended December 31, 20X4. During 20X4, trade receivables decreased by $1,000, trade payables increased by $5,000, wages payable increased by $3,000, and $18,000 in depreciation expense was recorded. Assuming no other adjustments are needed, what was the "net cash flow from operating activities" for 20X4 (parentheses indicate net cash outflow)? A. ($1,000). B. $23,000. C. $25,000. D. $29,000. Calculation: ($2,000) + $1,000 + $5,000 + $3,000 + $18,000 = $25,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

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Chapter 05 - Reporting and Interpreting Cash Flows

76. Assume the 20X4 income statement reported total sales revenue of $160,000. The 20X320X4, comparative statements of financial position showed that trade receivables increased by $10,000. What was the "cash inflow from customers" for 20X4? A. $140,000. B. $150,000. C. $160,000. D. $170,000. Calculation: $160,000 - $10,000 = $150,000.

77. Restless Company's 20X2 income statement reported total sales revenue of $100,000. The 20X1-20X2, comparative statements of financial position showed that trade receivables decreased by $10,000. What were the 20X2 "cash receipts from customers"? A. $80,000. B. $90,000. C. $100,000. D. $110,000. Calculation: $100,000 + 10,000 = $110,000.

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Chapter 05 - Reporting and Interpreting Cash Flows

78. WT Company reported sales revenue of $100,000 and total expenses of $90,000 (including depreciation) for the year ended December 31, 20X1. During 20X1, trade receivables decreased by $4,000, merchandise inventory increased by $3,000, trade payables increased by $2,000, and depreciation expense of $6,000 was recorded. Assuming no other data are needed, what was the net cash inflow from operating activities for 20X1? A. $19,000. B. $20,000. C. $21,000. D. $24,000. Calculation: $10,000 + 6,000 + 4,000 - 3,000 + 2,000 = $19,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

79. Trade receivables arising from sales to customers amounted to $35,000 and $40,000 at the beginning and end of the year, respectively. Profit reported on the income statement for the year was $120,000. Exclusive of the effect of other adjustments, the cash flows from operating activities, prepared using the indirect method, is A. $120,000. B. $155,000. C. $115,000. D. $125,000. Calculation: $120,000 - $5,000 = $115,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

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Chapter 05 - Reporting and Interpreting Cash Flows

80. ABC Company reported total sales revenue of $80,000 and total expenses of $72,000 (i.e., profit of $8,000) for the year ended December 31, 20X. During 20X, trade receivables increased by $3,000, merchandise inventory decreased by $2,000, trade payables increased by $1,000, and $5,000 in depreciation expense was recorded. Assuming no other adjustments to profit are needed, what was the net cash inflow from operating activities? A. $10,000. B. $11,000. C. $13,000. D. $19,000. Calculation: $8,000 - $3,000 + $2,000 + $1,000 + $5,000 = $13,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

81. The statement of cash flows (indirect method) reports depreciation expense as an addition to profit because depreciation does which of the following? A. Causes an inflow of funds for the replacement of assets. B. Reduces reported profit of the period but does not involve an outflow of cash for that period. C. Is a direct use of cash D. Reduces reported profit and causes an inflow of cash.

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Chapter 05 - Reporting and Interpreting Cash Flows

82. In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment is: A. added to net earnings. B. deducted from net earnings. C. ignored because it does not affect cash. D. ignored under operating activities because it is an investing activity.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

83. Travis Company reported a profit for 20X2 of $20,000, building depreciation expense of $6,000, and amortization expense (patent) of $5,000. Also, trade payables increased by $7,000 and inventory decreased by $2,000. What was the amount of "cash flows from operating activities" for 20X2? A. $34,000. B. $35,000. C. $36,000. D. $40,000. Calculation: $20,000 + $6,000 + $5,000 + $7,000 + $2,000 = $40,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method Topic: 05-12 Change in Accounts Payable

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Chapter 05 - Reporting and Interpreting Cash Flows

84. The 20X2 income statement of Dunn Company reported total sales revenue of $106,000 and total expenses of $108,000 (i.e., net loss, $2,000). Expenses were: building depreciation, $10,000 and patent amortization, $5,000. There was an increase in inventory of $1,000. What was cash flow from operating activities during 20X2 (parentheses indicate outflow)? A. ($3,000). B. $7,000. C. $12,000. D. $14,000. Calculation: ($2,000) + $10,000 + $5,000 - $1,000 = $12,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method Topic: 05-10 Changes in Accounts Receivable

85. Which of the following is not true of the direct method of preparing a statement of cash flows? A. It gives the user a sense of the magnitude of gross dollars flowing in and out of the company. B. It has the same cash flows from investing and financing activities as the indirect method. C. It results in a different net cash from operating activities than the indirect method. D. It reports the same net increase or decrease in cash as the indirect method.

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Chapter 05 - Reporting and Interpreting Cash Flows

86. The 20X2 income statement for Ryan Corporation showed the following:

Profit Depreciation expense

$81,000 8,000

The statement of financial position showed:

Trade receivables increase Prepaid expenses decrease

$5,000 2,000

What was the cash flow from operating activities? A. $66,000. B. $70,000. C. $82,000. D. $86,000. Calculation: $81,000 + $8,000 - $5,000 + $2,000 = $86,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method Topic: 05-10 Changes in Accounts Receivable Topic: 05-11 Change in Prepaid Expenses

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Chapter 05 - Reporting and Interpreting Cash Flows

87. Green Corporation reported net earnings of $50,000 for the year. During the year, trade receivables increased by $8,000, trade payables decreased by $4,000 and depreciation expense of $6,000 was recorded. Net cash provided by operating activities for the year, using the indirect method, is A. $54,000. B. $56,000. C. $50,000. D. $44,000. Calculation: $50,000 - $8,000 - $4,000 + $6,000 = $44,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method Topic: 05-10 Changes in Accounts Receivable Topic: 05-12 Change in Accounts Payable

88. Mason Corporation reported a net loss of $12,000 for the year ended December 31, 20X3. During the year, accounts receivable decreased $5,000, merchandise inventory increased $4,000, accounts payable increased by $13,000, and depreciation expense of $7,000 was recorded. During 20X3, operating activities using the indirect method was A. used net cash of $33,000. B. used net cash of $23,000. C. provided net cash of $9,000. D. provided net cash of $7,000. Calculation: (12,000) + $5,000 - $4,000 + $13000 + $7000 = $9,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method Topic: 05-10 Changes in Accounts Receivable Topic: 05-11 Change in Prepaid Expenses

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Chapter 05 - Reporting and Interpreting Cash Flows

89. The following information pertains to Kingston Inc. for 20X9:

Inventory January 1, Inventory December 31, Accounts payable January 1 Accounts payable December 31 Cost of goods sold during 20X9

$300,000 $335,000 $ 45,000 $ 48,000 $2,400,000

If Kingston prepares their cash flow statement using the indirect method, what adjustment to the net income will be made for the year when calculating their cash flow from operations? A. $35,000 addition to net income B. $35,000 deduction from net income C. $32,000 addition to net income D. $32,000 deduction from net income Increase in inventory ($35,000) + Increase in accounts payable $3,000 = ($32,000).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method Topic: 05-12 Change in Accounts Payable

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Chapter 05 - Reporting and Interpreting Cash Flows

90. Wyman Co. reported $36,000 of cash provided by operating activities and the following data:

Amortization Increase in accounts payable Increase in wages payable Decrease in taxes payable

$45,000 12,000 8,000 2,000

What must have been Wyman's profit/loss for the period? A. $27,000 loss B. $12,000 loss C. $10,000 profit D. $54,000 loss $36,000 + $2,000 - $45,000 - $12,000 - $8,000 = -$27,000.

91. A bank credit manager, while reviewing a company's cash flow statement, noticed that the company reported a large increase in inventory, but no increase in accounts receivable. Which of the following is not a possible explanation for this? A. The company experienced a decrease in demand for its products B. The company may be stockpiling inventory in anticipation of a strike at a supplier. C. The company increased its credit terms but not its production time. D. The company has obsolete inventory on hand.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-03 Analyze and interpret the quality of earnings ratio. Topic: 05-16 Interpreting Cash Flows from Operating Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

92. A banker contemplating a loan to a company should focus on which section(s) of the cash flow statement in order to determine the company's ability to repay the loan? A. Operating activities B. Financing activities C. Investing activities D. Operating and investing activities

93. Which of the following statements about the quality of earnings ratio is true? A. When sales are growing, receivables and inventory normally increase faster than payables so the ratio increases. B. Seasonal variations in sales have no impact on the quality of earnings ratio. C. Failure to accrue appropriate expenses will inflate net earnings and reduce the quality of earnings ratio. D. Failure to accrue appropriate expenses will inflate net earnings and increase the quality of earnings ratio.

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Hard Learning Objective: 05-03 Analyze and interpret the quality of earnings ratio. Topic: 05-16 Interpreting Cash Flows from Operating Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

94. Which of the following statements about the quality of earnings ratio is false? A. An increase in operating assets and a decrease in liabilities will reduce operating cash flows, thereby reducing the ratio. B. Seasonal variations in sales and purchases of inventory can cause wide deviations in the quality of earnings ratio. C. When sales are growing, receivables and inventory normally increase at a faster rate than trade payables often causing operating cash flows to be less than profit. D. Seasonal variations in sales have no impact on the quality of earnings ratio.

95. In 20X3, The W D Company reported net earnings of $1.3 billion and cash flow from operations of $5.6 billion. In 20X2, its net earnings was $1.9 billion and cash flow from operations was $5.1 billion. What were their quality of earnings ratios for 20X3 and 20X2 respectively? A. 0.23 and 0.37 B. 0.91 and 1.46 C. 1.10 and .68 D. 4.31 and 2.68 Calculation: $5.6/1.3; $5.1/1.9.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 05-03 Analyze and interpret the quality of earnings ratio. Topic: 05-16 Interpreting Cash Flows from Operating Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

96. In 20X3, C Co. reported a quality of earnings ratio of 1.60. In 20X2 and 20X1 the ratio was 0.97 and 0.98 respectively. Which of the following was the most likely cause of the large increase in the ratio? A. An increase in current assets such as receivables and inventory. B. An increase in trade payables and accrued liabilities. C. An increase in sales revenue while net earnings remained the same. D. A decrease in expense while net earnings remained the same.

97. Which item may be of concern when analyzing cash flow from operating activities? A. Increasing inventories B. Decreasing accounts receivable C. Repayment of debt at maturity D. Payments of dividends

98. Which of the following would increase earnings but lower the quality of reported earnings? A. Writing off obsolete inventory B. Embarking on a capital expansion C. Increasing operating expenses. D. Decreasing operating expenses

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Chapter 05 - Reporting and Interpreting Cash Flows

99. Which of the following would be an example of an investing activity on the cash flow statement? A. Sale of preferred shares B. Purchase of capital assets C. Repurchase of shares issued D. Dividends paid to shareholders

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 05-04 Report and interpret cash flows from investing activities. Topic: 05-17 Reporting and Interpreting Cash Flows from Investing Activities

100. Belmont Ltd had the following activity during 20X9:

Proceeds from sale of long-term investments Gain on the sale of long-term investments Loss on the disposal of equipment ($0 proceeds from disposal) Proceeds from sale of preferred shares Repayment of long-term debt

$156,000 $16,000 $17,000 $182,000 $30,000

What is the cash flow from investing activities? A. $16,000. B. $156,000. C. $155,000. D. $189,000. Only proceeds from sale of long-term investments would qualify as an investing activity.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-04 Report and interpret cash flows from investing activities. Topic: 05-17 Reporting and Interpreting Cash Flows from Investing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

101. Crocker Inc. had the following activity during 20X7:

Proceeds from sale of bonds payable Loss from disposal of equipment ($0 proceeds from disposal) Dividends paid to shareholders Sale of shares Gain on the sale of short term investments

$200,000 $38,000 $25,000 $125,000 $75,000

What is the cash flow from investing activities? A. $57,000 B. $0 C. $93,000 D. $22,000 Zero since there were no proceeds for the equipment and none of the other transactions qualify as investing activities.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 05-04 Report and interpret cash flows from investing activities. Topic: 05-17 Reporting and Interpreting Cash Flows from Investing Activities Topic: 05-19 Property, Plant, and Equipment—Net

102. A company sold a piece of land for $40,000 which had an original cost of $25,000. What is the cash flow effect of this transaction? A. $15,000 increase in cash flows from operations. B. $25,000 increase in cash flows from investing activities. C. $40,000 increase in cash flows from investing activities. D. $15,000 increase in cash flows from investing activities.

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Chapter 05 - Reporting and Interpreting Cash Flows

103. Keller Inc. had the following activities during the year:

Proceeds from the sale of land Gain on sale of land Proceeds from the issue of common shares Purchase of equipment

$346,000 $46,000 $800,000 $450,000

What was Keller's cash flow from investing activities for the year? A. $300,000 Cash outflow from investing activities. B. $796,000 Cash inflow from investing activities. C. $150,000 Cash inflow from investing activities. D. $104,000 Cash outflow from investing activities. Proceeds from land sale $346,000 - cash used to purchase equipment $450,000 = $104,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 05-04 Report and interpret cash flows from investing activities. Topic: 05-18 Reporting Cash Flows from Investing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

104. Big Machine Corp had the following activities during the year:

Proceeds from the sale of land Gain on sale of land Proceeds from the issue of common shares Purchase of equipment Repayment of mortgage outstanding on the sold land Interest paid Dividends paid

$300,000 $50,000 $1,000,000 $450,000 $200,000 $22,500 $10,000

What was Big Machine's cash flow from investing activities for the year? A. $350,000 outflow B. $150,000 outflow C. $100,000 outflow D. $150,000 inflow Proceeds from land sale $300,000 - cash used to purchase equipment $450,000 = ($150,000).

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Chapter 05 - Reporting and Interpreting Cash Flows

105. In 20X3, Cee Co. disclosed cash paid for property, plant and equipment of $1.069 million and cash flow from operations of $3.883 million. Their average property, plant and equipment from the comparative statement of financial position was $3.968 million. Compute Cee Co.'s capital expenditures ratio for 20X3. A. 28 B. 77 C. 98 D. 3.63 Calculation: $3.883/1.069 = 3.63.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-05 Analyze and interpret the capital expenditures ratio. Topic: 05-20 Interpreting Cash Flows from Investing Activities

106. In the years 20X0-20X3, Bee Co.'s capital expenditures ratio was 2.74 and from 20X420X7, it was 1.24. From 20X4-20X7, Are Co.'s ratio was .30. Which of the following statements about Bee Co.'s capital expenditures ratio is correct? A. Bee Co.'s capital expenditure ratio is relatively low and indicates inability to finance property, plant and equipment with cash flow from operations. B. It appears that Are Co. is more aggressive about investing in additional property, plant and equipment than is Bee Co. C. Bee Co.'s ratio has improved in the period 20X4-20X7. D. It appears that Bee Co. is more aggressive about investing in additional property, plant and equipment than is Are Co.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 05-05 Analyze and interpret the capital expenditures ratio. Topic: 05-20 Interpreting Cash Flows from Investing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

107. Mansour Machines had cash flow from operations of $5,070, cash flows from investments of $(1,244), capital expenditures of $1,244, cash flows from financing of $(3,537), including $1,500 of dividends paid, and net income of $2,314. Mansour's free cash flow is: A. $2,326 B. $1,533 C. $2,756 D. $3,826 $5,070 - $1,244 - $1,500 = $2,326.

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Chapter 05 - Reporting and Interpreting Cash Flows

108. Havery has the following cash flow & earnings numbers:

Cash flows from operations Capital expenditures Net income Dividends declared Dividends paid

$585 $154 $166 $210 $180

Havery has free cash flows of: A. $221 B. $251 C. $375 D. $541 $585 - $154 - $180 = $252.

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Chapter 05 - Reporting and Interpreting Cash Flows

109. The following information was available for Brockville Corp for the 20X6 fiscal year:

Cash inflow from financing activities Cash outflow from investing activities Cash inflow from operations Dividends paid Amount spent on capital expenditures

$225,000 $415,000 $372,500 $25,000 $300,000

What is Brockville's free cash flow for 20X6? A. ($67,000) B. ($42,000) C. $47,500 D. $347,500 $372,500 - $300,000 - $25,000 = $47,500.

110. Typical financing activities do NOT include the following A. Proceeds from issuance of short- and long-term borrowings. B. Principal payments on short- and long-term borrowings. C. Purchase of short- or long-term investments for cash. D. Purchase of shares for retirement.

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Chapter 05 - Reporting and Interpreting Cash Flows

111. Melmore Ltd had the following activity during 20X7:

$156,000 $16,000 $17,000 $182,000 $30,000

What is the cash flow from financing activities? A. $135,000 B. $168,000 C. $169,000 D. $152,000 $182,000 - $30,000 = $152,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-06 Report and interpret cash flows from financing activities. Topic: 05-22 Reporting Cash Flows from Financing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

112. Crocker Inc. had the following activity during 20X7:

Proceeds from sale of bonds payable Loss from disposal of equipment (Net book value $60,000) Dividends paid to shareholders Sale of shares Gain on the sale of short term investments

$200,000 $38,000 $25,000 $125,000 $75,000

What is the cash flow from financing activities? A. $300,000 B. $292,000 C. $325,000 D. $275,000 $200,000 - $25,000 + $125,000 = $300,000.

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Chapter 05 - Reporting and Interpreting Cash Flows

113. Randy, Inc., issued $50,000 of bonds, paid cash dividends of $8,000, sold long-term investments for $12,000, received $5,000 of dividend revenue, purchased treasury shares for $15,000, and purchased new equipment for $19,000. What is the net cash flow from financing activities? A. ($20,000). B. $27,000. C. $70,000. D. $80,000. Calculation: $50,000 - $8,000 - $15,000 = $27,000.

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Chapter 05 - Reporting and Interpreting Cash Flows

114. Kinross Corp had the following activities during the year:

Proceeds from the sale of land Gain on sale of land Proceeds from the issue of common shares Purchase of equipment Repayment of mortgage outstanding on the sold land Interest paid Dividends paid

$300,000 $50,000 $1,000,000 $450,000 $200,000 $22,500 $10,000

What was Kinross' cash flow from financing activities for the year? A. $767,500 inflow B. $790,000 inflow C. $800,000 inflow D. $1,000,000 inflow $1,000,000 - $200,000 - $10,000 = $790,000.

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Chapter 05 - Reporting and Interpreting Cash Flows

115. A new, fast-growing company may typically have which of the following patterns of cash flows? A. Negative cash flows from operations, cash outflows from financing and cash inflows from investing. B. Negative cash flows from operations, cash inflows from financing and cash outflows from investing. C. Positive cash flows from operations, cash outflows from financing and cash inflows from investing. D. Positive cash flows from operations, cash inflows from financing and cash outflows from investing.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 05-06 Report and interpret cash flows from financing activities. Topic: 05-27 Interpreting Cash Flows from Financing Activities

116. A stable, mature company may typically have which of the following patterns of cash flows? A. Positive cash flows from operations, cash outflows from financing and cash inflows from investing. B. Positive cash flows from operations, cash inflows from financing and cash outflows from investing. C. Positive cash flows from operations, cash outflows from financing and cash outflows from investing. D. Positive cash flows from operations, cash inflows from financing and cash inflows from investing.

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Chapter 05 - Reporting and Interpreting Cash Flows

117. A company wants to maintain its current debt/equity ratio. Which of the following relationships would most likely occur on the cash flow statement? A. Cash from operations would be equal to any debt paid off during the year. B. Cash from operations would be equal to cash from financing activities for the year. C. New borrowings would be less than cash from operations for the year. D. New borrowings would equal any debt paid off.

118. A company acquired some land, which had been independently appraised at $12,000, and paid for it by issuing 1,000 shares of its common shares. The shares had a par value of $10 per share and no market price was available. How should this be reported on the statement of cash flows? A. Report $12,000 as inflow and outflow of cash. B. Report $12,000 as an inflow of cash. C. Should not be reported on the statement of cash flows. D. Report on a schedule of significant non cash transactions if it is material.

119. Preferred shares issued in exchange for land would be reported on the statement of cash flows in: A. the cash flows from financing activities section. B. the cash flows from investing activities section. C. the Income statement. D. Not reported in statement of cash flows as no cash changed hands.

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Chapter 05 - Reporting and Interpreting Cash Flows

120. Lori Company sold an operational asset, a machine, for cash. It originally cost $20,000. The accumulated depreciation at the date of disposal was $15,000. A gain on the disposal of $2,000 was reported. What was the cash inflow from this transaction? A. $3,000. B. $4,000. C. $5,000. D. $7,000. Calculation: ($20,000 - $15,000) + $2,000 = $7,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-32 Appendix 5A: Adjustment for Gains and Losses on the Sale of Long-Lived Assets—Indirect Method

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Chapter 05 - Reporting and Interpreting Cash Flows

121. Nelson Company collected the following data in its accounting records in 20X7:

Income Statement Depreciation expense Loss on sale of equipment

$1,000 $3,000

Statement of Financial Position Beginning balance $12,500 equipment Ending balance $8,000 equipment Beginning balance $2,000 accumulated depreciation Ending balance $2,400 accumulated depreciation

No new equipment was purchased during the year. What was the cash inflow from the sale of equipment in 20X7? A. $600. B. $900. C. $1,000. D. $3,900. Calculation: ($12,500 - $8,000) - ($2,000 + $1,000 - $2,400) - $3,000 = $900.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-32 Appendix 5A: Adjustment for Gains and Losses on the Sale of Long-Lived Assets—Indirect Method

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Chapter 05 - Reporting and Interpreting Cash Flows

122. If a loss of $20,000 is incurred in selling (for cash) office equipment that cost $90,000 and had accumulated depreciation of $22,500, the total amount reported in the investing activities section of the statement of cash flows is A. $70,000. B. $67,500. C. $47,500. D. $87,500. $90,000 - $22,500 - $20,000 = $47,500.

123. Crocker Inc. had the following activity during 20X7:

Proceeds from sale of bonds payable Loss from disposal of equipment (Net book value $60,000) Dividends paid to shareholders Sale of shares Gain on the sale of short term investments

$200,000 $38,000 $25,000 $125,000 $75,000

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Chapter 05 - Reporting and Interpreting Cash Flows

What is the cash flow from investing activities? A. $57,000 B. $75,000 C. $93,000 D. $22,000 $60,000 net book value - $38,000 loss on disposal = $22,000 proceeds.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-32 Appendix 5A: Adjustment for Gains and Losses on the Sale of Long-Lived Assets—Indirect Method

124. The financial statements for Ozzie Company show the following:

Merchandise inventory Trade receivables Trade payables Cost of Goods Sold

Beginning balance $25,000 35,000 18,000

Ending balance $26,000 33,000 21,000 $121,000

How much cash was paid for merchandise? A. $117,000. B. $119,000. C. $121,000. D. $124,000. $121,000 + $1,000 - $3,000 = $119,000 OR $121,000 + $26,000 - $25000 = $122,000(Cogs + Opening inventory - Closing inventory = Purchase of inventory during the year) $122,000 + $18,000 - $21,000 = $119,000 (Purchase of inventory during the year + Opening balance of payables - Closing balance of payables).

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Chapter 05 - Reporting and Interpreting Cash Flows

125. The financial statements of Juliet Company show the following:

Trade receivables Trade payables Sales

Beginning balance $28,000 $21,000

Ending balance $22,000 $25,000 $154,000

How much cash was collected from customers? A. $148,000. B. $150,000. C. $154,000. D. $160,000. Calculation: $154,000 + $6,000 = $160,000.

126. The financial statements of Juliet Company show the following:

Trade receivables Trade payables Purchases

Beginning balance $28,000 $11,000

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Ending balance $22,000 $15,000 $74,000

Chapter 05 - Reporting and Interpreting Cash Flows

How much cash was paid out to suppliers? A. $11,000. B. $15,000. C. $70,000. D. $74,000. $74,000 - ($15,000 - $11,000) = $70,000.

127. The financial statements of Juliet Company show the following:

Trade receivables Inventories Trade payables COGS

Beginning balance $28,000 $38,400 $11,000

Ending balance $22,000 32,000 $15,000 $74,000

How much cash was paid out to suppliers? A. $15,000 B. $70,000 C. $85,000 D. $67,600 Step 1 Find purchases: Beg Inv + purchases - ending inv = COGS. So $38,400 + purchases - $32,000 = $74,000 purchases = $67,600 Step 2 Calculate cash paid Beg A/P $11,000 + purchases $67,600 - end A/P $15,000 = $63,600.

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Chapter 05 - Reporting and Interpreting Cash Flows

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-33 Appendix 5B: Reporting Cash Flows from Operating Activities—Direct Method

128. The sales terms for Jensen Company are 10 percent down and the balance due by the end of the following month. Sales for January, February and March were $8,500, $11,500 and $13,000 respectively. The cash collections from operations for the month of February would be closest to? A. $7,600 B. $8,800 C. $10,350 D. $1,150 ($8,500 ´ 90%) + ($11,500 ´ 10%) = $8,800.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-33 Appendix 5B: Reporting Cash Flows from Operating Activities—Direct Method

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Chapter 05 - Reporting and Interpreting Cash Flows

Short Answer Questions 129. Match each activity below with the proper classification by inserting the proper capital letter in the space to the left. Classification of Activity I. Investing F. Financing O. Operating

1. Collection of interest on a note receivable 2. Payment of debt principal with cash 3. Sales of operational assets 4. Payment of cash dividends 5. Cash repurchase of shares 6. Borrowing cash from the bank 7. Purchase of operational assets for cash 8. Collections of dividends on long term investments

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Chapter 05 - Reporting and Interpreting Cash Flows

Solution:

O F I F F F I O or I

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-01 Classification of Cash Flows Topic: 05-02 Cash Flows from Operating Activities Topic: 05-03 Cash Flows from Investing Activities Topic: 05-04 Cash Flows from Financing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

130. Selected transactions of Duffy Inc. are listed below. 1. Common shares are sold for cash. 2. Bonds payable are issued for cash at a discount. 3. Interest on a short-term note receivable is collected. 4. Merchandise is sold to customers for cash. 5. Cash is paid to purchase inventory. 6. Equipment is purchased by signing a 3-year, 5% note payable. 7. Cash dividends on common shares are declared and paid. 8. One hundred common shares of Strategic Allance Co. are purchased for cash. 9. Land is sold for cash at book value. 10. Recorded an increase in the market value of available-for-sale securities. 11. Bonds payable are issued for cash at par value Classify each transaction as either A - an operating activity, B - an investing activity, C - a financing activity, or D - a non cash investing and financing activity. Solution: C C A A A D C B B D

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-01 Classification of Cash Flows Topic: 05-02 Cash Flows from Operating Activities Topic: 05-03 Cash Flows from Investing Activities Topic: 05-04 Cash Flows from Financing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

131. Selected transactions of Torts Corporation are listed below. 1. Collected a trade receivable. 2. Declared and paid dividends on common shares. 3. Sold long-term investments for cash. 4. Issued common shares for equipment. 5. Repaid a five-year note payable. 6. Paid employee wages. 7. Converted bonds payable to common shares. 8. Acquired long-term investment with cash. 9. Sold buildings and equipment for cash. 10. Sold merchandise to customers. Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a non cash investing and financing activity. Solution: A C B D C A D B B A

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 05-01 Classify cash flow items into cash flows from operating, investing, and financing activities. Topic: 05-01 Classification of Cash Flows Topic: 05-02 Cash Flows from Operating Activities Topic: 05-03 Cash Flows from Investing Activities Topic: 05-04 Cash Flows from Financing Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

132. Connor Limited reported net earnings of $265,000 for the current year. Depreciation expense recorded on buildings and equipment amounted to $82,000 for the year. Balances of the current assets and current liabilities accounts at the beginning and end of the year are as follows:

Cash Trade receivables Inventories Prepaid expenses Trade payables Income taxes payable

Beginning of year $15,000 22,500 57,000 4,000 18,000 900

End of year $20,000 16,500 52,000 8,500 14,000 1,200

Prepare the operating activities section of the cash flow statement using the indirect method. Please review the following information:

Net Earnings Adjustments: Depreciation expense Decrease in trade receivables Decrease in inventories Increase in prepaid expenses Decrease in trade payables Increase in income taxes payable Net cash provided by operations

$265,000 82,000 6,000 5,000 (4,500) (4,000) 300 $349,800

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-10 Changes in Accounts Receivable Topic: 05-11 Change in Prepaid Expenses Topic: 05-12 Change in Accounts Payable

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Chapter 05 - Reporting and Interpreting Cash Flows

133. Using the indirect method, calculate the amount of cash flows from operating activities from the following data:

Net Earnings Beginning trade receivables Ending trade receivables Beginning prepaid expenses Ending prepaid expenses Beginning trade payables Ending trade payables Depreciation expense Dividends declared and paid Interest expense

$275,000 43,000 37,000 10,000 3,000 19,000 14,000 48,000 12,000 5,000

Please review the following information:

Net Earnings + Decrease in trade receivables + Decrease in prepaid expenses - Decrease in trade payables + Depreciation expense Cash flows from operating activities

$275,000 6,000 7,000 -5,000 48,000 $331,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-10 Changes in Accounts Receivable Topic: 05-11 Change in Prepaid Expenses Topic: 05-12 Change in Accounts Payable

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Chapter 05 - Reporting and Interpreting Cash Flows

134. The comparative balance sheets for Gillen Inc. appear below:

Dec 31, 20X7 Assets Cash Trade receivables Prepaid expenses Inventory Long-term investments Equipment Accumulated depreciationequipment Total assets Liabilities and Shareholders' Equity Trade payables Mortgage notes payable Common shares Retained earnings Total liabilities and shareholders' equity

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Dec. 31, 20X6

$29,000 23,000 6,000 25,000 0 57,000 (18,000)

$10,000 14,000 9,000 15,000 23,000 30,000 (14,000)

$122,000

$87,000

$21,000 37,000 40,000 24,000 $122,000

$9,000 45,000 23,000 10,000 $87,000

Chapter 05 - Reporting and Interpreting Cash Flows

Additional information: 1. Net earnings for the year ending December 31, 20X7 were $27,000. 2. Cash dividends of $13,000 were declared and paid during the year ended December 31 20X7. 3. Long-term investments that had a carrying amount of $23,000 were sold for $18,000 in 20X7. Prepare a cash flow statement for the year ended December 31, 20X7, using the indirect method. Please review the following information: GILLEN INC. Cash Flow Statement Year Ended December 31, 20X7

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Chapter 05 - Reporting and Interpreting Cash Flows

Operating activities Net earning Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation expense Loss on sale of longterm investment in bonds Increase in trade receivables Decrease in prepaid expense Increase in inventory Increase in trade payable Net cash provided by operating activities Investing activities Sale of long-term investments Purchase of equipment Net cash used by investing activities Financial activities Issues of common shares Repayment of mortgage notes payable Payment of cash dividend Net cash used by financing activities Net increase in cash Cash, January 1 Cash, December 31

$27,000

$4,000 5,000 (9,000) 3,000 (10,000) 12,000

5,000 $32,000

$18,000 (27,000) (9,000) $17,000 (8,000) (13,000) (4,000) 19,000 10,000 $29,000

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Chapter 05 - Reporting and Interpreting Cash Flows

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Hard Learning Objective: 05-07 Explain the format of the statement of cash flows and additional cash flow disclosures. Topic: 05-28 Completing the Statement and Additional Disclosures Topic: 05-29 Statement Structure

135. A comparative balance sheet for Austin Corporation is presented below:

20X7 Assets Cash Trade receivables (net) Prepaid insurance Land Equipment Accumulated depreciation Total assets Liabilities and Shareholders' Equity Trade payables Bonds payable Common shares Retained earnings Total liabilities and shareholders' equity

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20X6 $39,000 73,000 19,000 18,000 70,000 (20,000) $199,000

$31,000 60,000 17,000 40,000 60,000 (13,000) $195,000

$11,000 27,000 140,000 21,000 $199,000

$6,000 19,000 115,000 55,000 $195,000

Chapter 05 - Reporting and Interpreting Cash Flows

Additional information for 20X7: 1. Net loss for 20X7 is $25,000. 2. Cash dividends of $9,000 were declared and paid in 20X7. 3. Land was sold for cash at a loss of $10,000. This was the only land transaction during the year. 4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash. 5. $12,000 of bonds were retired during the year at their carrying amount. 6. Equipment was acquired for common shares. The fair value of the shares at the time of the exchange was $25,000. Prepare a cash flow statement for the year ended 20X7, using the indirect method. AUSTIN CORPORATION Cash Flow Statement Year Ended December 31, 20X7

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Chapter 05 - Reporting and Interpreting Cash Flows

Operating activities Net loss Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation expense (a) Loss on sale of land Increase in trade receivables Increase in prepaid expenses Increase in trade payables Net cash used by operating activities Investing activities Proceeds from the sale of land (b) Proceeds from the sale of equipment Net cash provided by investing activities Financial activities Retirement of bonds payable Issue of bonds payable Payment of dividends Net cash used by financing activities Increase in cash Cash, January 1 Cash, December 31

$(25,000)

$17,000 10,000 (13,000) (2,000) 5,000

17,000 (8,000)

$12,000 5,000 17,000

$(12,000) 20,000 (9,000) (1,000) 18,000 31,000 $49,000

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Chapter 05 - Reporting and Interpreting Cash Flows

Noncash investing and financing activities Purchase of equipment through issue of common shares

(a)

(b)

$25,000

Accumulated Depreciation, December 31, 20X6 Accumulated Depreciation, December 31, 20X7 Difference Add: Accumulated depreciation on equipment sold Depreciation expense Cost of land sold Less: Loss on sale of land Proceeds from sale of land

$13,000 20,000 7,000 10,000 $17,000 $22,000 (10,000) $12,000

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Chapter 05 - Reporting and Interpreting Cash Flows

136. Reba Company reported profit of $10,000 for 20X1. Additional 20X1 information is as follows:

Expenditures for operational assets Depreciation expense on operational assets Dividends paid on common shares Net increase in trade payables Net decrease in inventory Amortization of patent Net decrease in trade receivables

$6,000 2,000 900 400 200 100 300

Based on the information given above, the statement of cash flows would show "cash flows from operating activities" of $ ______________ $10,000 + $2,000 + $400 + $200 + $100 + $300 = $13,000

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Chapter 05 - Reporting and Interpreting Cash Flows

137. McIntire Company reported net earnings of $40,000 which included depreciation expense and depletion expense of $21,000 and $18,000, respectively. The following changes also occurred during 20X3

Inventory Trade payables Notes payable (long-term) Income tax payable Trade receivables

$10,000 decrease 5,000 increase 15,000 decrease 7,000 increase 10,000 increase

The amount of "cash flows from operating activities" was $ ______________ $40,000 + $21,000 + $18,000 + $10,000 + $5,000 + $7,000 - $10,000 = $91,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

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Chapter 05 - Reporting and Interpreting Cash Flows

138. The following changes were noted from the statement of financial position: trade receivables increased $8,000; inventory increased $4,000; trade payables increased $6,000; prepaid expense decreased $2,000; accrued liability decreased $5,000; and interest payable increased $1,000 ABC Corporation Income Statement For the Year Ended December 31, 20X7

Net sales Cost of goods sold Gross profit on sales Various operating expenses Depreciation expense Interest expense Income tax expense Net earnings

$100,000 $(40,000) $60,000 $25,000 5,000 2,000 4,000

$(63,000) $24,000

Required: Prepare the operating activities section of the statement of cash flows using the indirect method. Please review the following information:

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Chapter 05 - Reporting and Interpreting Cash Flows

Net earnings Adjustments to reconcile net income to net cash provided by operations: Trade receivables increase Inventory increase Trade payables increased Prepaid expense decrease Accrued liability decrease Interest payable increase Depreciation expense Net cash provided by operating activities

$24,000

$(8,000) $(4,000) $6,000 $2,000 $(5,000) $1,000 $5,000 $21,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-02 Report and interpret cash flows from operating activities, using the indirect method. Topic: 05-09 Reporting Cash Flows from Operating Activities—Indirect Method

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Chapter 05 - Reporting and Interpreting Cash Flows

139. The following information was reported from the statement of cash flows for The W D Company for the years 2015 through 2017 in millions of dollars:

20X7 Net earnings Cash provided by operations Cash used by investments Cash provided/used by financing

20X6

20X5

$1,300 $5,599

$1,850 $5,115

$1,966 $5,099

$(5,310)

$(5,665)

$(3,936)

$360

$(1,124)

A. Calculate the quality of earnings ratio for the years 20X5 through 20X7. B. Interpret the quality of earnings ratio for The W D Company for the three-year period. (A) 20X7: 4.30, 20X6: 2.76, 20X5: 2.59. (B) The W D Company had a strong quality of earnings ratio for all three years. They could generate positive cash flow from a low of $2.59 for every dollar in net income earned to a high of $4.30 of cash for every dollar of net earnings. The ratio took a big jump in 2017 primarily caused by an increase in cash flow from operations and a decrease in net earnings of over a half billion dollars. The change in net earnings was the major influence on the increase in the quality of earnings ratio.

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Chapter 05 - Reporting and Interpreting Cash Flows

140. Cox Co. reported the following information from their statement of cash flows in millions of dollars:

20X7 Profit Cash provided by operating activities

20X6 $2,431 $3,883

20X5 $3,533 $3,433

$4,129 $4,033

(A) Calculate the quality of earnings ratio for Cox Co for the three years: (B) In 20X6, Pax Co. reported a quality of earnings ratio of 1.61. Compare C Co.'s quality of earnings ratio for that year to their competitor's ratio. (A) 20X7: 1.60, 20X6: .97, 20X5: .98. (B) In 20X6, Cox Co.'s quality of earnings ratio was .97 compared to Pax Co's ratio of 1.61. Cox Co.'s ratio was much lower but it was still close to a ratio of one, so overall its ratio was adequate. Pax Co.'s ratio showed their ability to generate better cash flow from their earnings than did Cox Co.; however, by 20X7, it appears as if Cox Co.'s ratio has improved and is in line with Pax Co's 20X6 ratio.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 05-03 Analyze and interpret the quality of earnings ratio. Topic: 05-16 Interpreting Cash Flows from Operating Activities

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Chapter 05 - Reporting and Interpreting Cash Flows

141. The following information was available from the financial statements of C Co. Company for the years 20X6 and 20X7 in millions of dollars:

20X7 Cash flow from operating activities Cash paid for purchases of property, plant, and equipment Average property, plant and equipment, net

20X6 $3,883

$3,433

$1,069

$863

$3,968

$3,706

A. Calculate the capital expenditures ratio for C Co. for the two years: B. Comment on the sufficiency of the capital expenditures ratio for the two years. (A) 20X7: 3.63, 20X6: 3.98. (B) The ratio appears to be sufficient in both years. C Co. is generating $3.63 of cash flow from operations for every $1 they are investing in new plant and equipment as of 20X7. This indicates they do not need to borrow or issue shares to secure external financing for their expansion of plant and equipment assets.

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Chapter 05 - Reporting and Interpreting Cash Flows

142. The following information is provided from the cash flow statement for Toys 4 U for the years 20X3 through 20X7 in millions of dollars:

Cash provided by operating activities Capital expenditures, net

20X7 $964

20X6 $509

20X5 $743

20X4 $250

20X3 $592

$373

$494

$415

$468

$586

(A) Calculate the capital acquisitions ratio for Toys 4 U for the five-year period from 20X3 to 20X7. (B) Comment on the capital acquisitions ratio for Toys 4 U for the five years. (A) 20X7: 2.58, 20X6: 1.03, 20X5: 1.79, 20X4: .53, 20X3: 1.01. (B) The capital acquisitions ratio for Toys 4 U has been erratic over the five years ranging from a low of .53 to a high of 2.58. During the five years from 20X3 to 20X7, the company had been investing between $586 million to $373 million in property, plant and equipment. However, their cash flow from operations was very erratic ranging from a high of $964 million in 20X7 to a low of $250 million in 20X4. The ratio has been affected not only by the level of investments in these long-lived assets, but by the erratic inflow of cash from operations. In 20X7, the ratio was at its highest point at 2.58 caused by a decrease in the level of investment, $373 million, while cash inflow was at its peak of $964 million.

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Chapter 05 - Reporting and Interpreting Cash Flows

143. The accounting intern has approached you for help. While preparing a statement of cash flow, she encountered the following transaction: February 1, 20X1: Zorro Corporation acquired a small office building in exchange for 5,000 shares of its own common shares; par value $10 per share; market value $15 per share. Should this transaction be included in the calculations on the statement of cash flows or shown in the notes? Why? Because it is a direct exchange, it is reported on the statement of cash flows in the Schedule of Non-cash Investing and Financing Transactions as "Office building, acquired for 5,000 shares of Zorro's common shares, $75,000."

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 05-07 Explain the format of the statement of cash flows and additional cash flow disclosures. Topic: 05-31 Supplemental Cash Flow Information

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Chapter 06 Reporting and Interpreting Sales Revenue, Receivables, and Cash

True / False Questions 1. Sales revenue is measured as the market value of the consideration received, or the book value of the item sold, whichever is more reliable. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-01 Apply the core revenue recognition principle to determine the accepted time to record sales revenue for typical manufacturers, wholesalers, retailers, and service companies. Topic: 06-01 Accounting for Sales Revenue

2. For most merchandisers and manufacturers, the required revenue recognition point is the time of shipment or delivery of goods. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-01 Apply the core revenue recognition principle to determine the accepted time to record sales revenue for typical manufacturers, wholesalers, retailers, and service companies. Topic: 06-01 Accounting for Sales Revenue

3. "FOB shipping point" means that title to the shipped goods passes to the buyer when they are delivered. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-01 Apply the core revenue recognition principle to determine the accepted time to record sales revenue for typical manufacturers, wholesalers, retailers, and service companies. Topic: 06-01 Accounting for Sales Revenue

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

4. For service companies, revenue is recognized the time at which services are provided. TRUE

5. A merchant who accepts credit cards as payment exposes himself to greater risk of credit card fraud. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-04 Credit Card Sales to Customers

6. A credit card discount will normally attract more customers to make purchases. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-04 Credit Card Sales to Customers

7. A credit card discount means the sales revenue will be recorded at less than one hundred percent. TRUE

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

8. Credit terms "2/10, n/30" mean that if payment is made in two days, a 10% discount will be given; if not paid within two days, the full invoice price will be due in thirty days. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-05 Sales Discounts to Businesses

9. The sales returns and allowances account should be reported as a deduction from sales revenue because it is a contra revenue account. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-06 Sales Returns and Allowances

10. Both credit card discounts and cash discounts can be recorded either as contra revenues or as expenses. TRUE

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

11. If the terms are 3/15, n/45 on a credit sale, the customer will save 3% of the invoice price by paying at least 30 days before the credit period ends. TRUE

12. Sales returns and allowances should be deducted from sales revenue when computing net sales. TRUE

13. Many merchants accept credit cards for the sale of goods because it can increase the number of customers. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-04 Credit Card Sales to Customers

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

14. While sales discounts and credit card discounts can only be treated as contra revenues, sales returns and allowances are treated as either a contra revenue or a selling expense. FALSE

15. It is important to record sales returns and allowances in a separate account so that management can determine the volume of returns and allowances in order to measure the quality of their products. TRUE

16. The gross profit percentage is computed by taking operating profit divided by net sales. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

17. Managers, analysts, and creditors use gross profit percentage to assess the effectiveness of the company's product development, marketing, and production strategy. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

18. The gross profit percentage measures the ability to charge premium prices and produce goods and services at lower cost. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

19. MP Co.'s gross profit percentage decreased from 59.2% in 20X2 to 58.3% in 20X3. This means that MP Co.'s cost of goods sold as a percentage of sales has decreased. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

20. An aging of trade accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the more unlikely it will eventually be collected. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-04 Estimate, record, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Topic: 06-16 Estimating Bad Debts

21. The allowance method of accounting for bad debts violates the matching principle. FALSE

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

22. The allowance method for receivables requires an estimation of bad debts in the current period because waiting to see whether receivables are collected would violate the matching principle. TRUE

23. Bad debt expense always equals the ending balance amount in the allowance for doubtful accounts. FALSE

24. A note receivable has a maturity date. TRUE

6-7

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

25. An amount receivable from an insurance company for damaged inventory would be classified as a trade receivable. FALSE

26. Trade receivables which are more than one-year old are normally transferred to noncurrent receivables. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 06-04 Estimate, record, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Topic: 06-09 Classifying Receivables

27. The gross amount of accounts receivable is reflected on the balance sheet, indicating the amount the company expects to collect in cash FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-04 Estimate, record, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Topic: 06-09 Classifying Receivables

6-8

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

28. Under the allowance method for uncollectible accounts, bad debts expense is recorded when an individual customer defaults because that's when it is certain. FALSE

29. Uncollectible accounts must be estimated for current period credit sales because it is not possible to know which accounts will not be collected in the following period TRUE

30. Under the allowance method for uncollectible accounts, the entry to write off an uncollectible account involves statement of financial position accounts as well as income statement accounts FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-04 Estimate, record, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Topic: 06-10 Accounting for Bad Debts

6-9

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

31. The percentage of trade receivables basis of estimating uncollectible accounts ignores the existing balance in the allowance account when the bad debts adjusting entry is recorded. FALSE

32. Under the aging method of estimating the allowance for doubtful accounts, the balance in the allowance account must be considered prior to adjusting for estimated uncollectible accounts. TRUE

33. It is possible for the allowance account to have a debit balance before the adjusting entry is recorded. TRUE

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

34. Allowance for Doubtful Accounts is credited, and bad debt expense is debited when an account is determined to be uncollectible FALSE

35. Under the allowance method for uncollectible accounts, the recovery of an account receivable results in a credit to the Bad Debt Expense account. FALSE

36. Allowance for Doubtful Accounts is a contra account that is deducted from Trade Accounts Receivable on the statement of financial position. TRUE

37. The Allowance for Doubtful Accounts is a liability account. FALSE

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

38. Net realizable value is determined by subtracting Trade accounts Receivable from the Allowance for Doubtful Accounts. FALSE

39. Bad Debts Expense is a contra asset account for Trade Accounts Receivable. FALSE

40. Under the allowance method for uncollectible accounts, Bad Debts Expense is debited when an account is deemed uncollectible and must be written off. FALSE

41. The lower the receivables turnover, the more effectively the company has managed their credit granting and collection activities. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivables turnover ratio and the effects of accounts receivable on cash flows. Topic: 06-22 Internal Control and Management Responsibility

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

42. The trade receivable turnover ratio is computed by dividing net sales by net trade receivables at the end of the year. FALSE

43. The percentage of credit sales method for estimating bad debt expense is based on the assumption that the amount of bad debts is a function of the total sales made on credit. TRUE

44. The percentage of credit sales method for estimating bad debt expense is based on the assumption that the amount of bad debts is a function of the ending balance in accounts receivable. FALSE

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

45. Analyzing the accounts receivable turnover is important in assessing the short-term liquidity of a business. TRUE

46. The reason that we must adjust revenue for the change in trade receivables to convert the figure to cash collected from customers is that trade receivables represent sales revenue not collected from customers at the beginning and at the end of the accounting year. TRUE

47. Companies who offer credit terms should require approval of customers' credit history by a person independent of the sales and collection functions. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-23 Control over Accounts Receivable

48. Companies who offer credit terms should require approval of customers' credit history by the sales manager of the account. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-23 Control over Accounts Receivable

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

49. An effective control activity results when two individuals are assigned to one cash drawer so that each can serve as check on the other. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

50. Only large companies need to be concerned with a system of internal control as small companies are simpler. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

51. A good system of internal control does not require monitoring. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

52. Errors can give rise to misstatements in the financial statements. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

53. Control activities are most effective when several people are responsible for a given task though it is less efficient. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

54. All documents should be pre-numbered. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

55. Control over cash disbursements is improved if all expenditures are paid by cheque or through use of electronic funds transfers. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-26 Cash Management

56. An example of separation of duties is having a cheque signer record cash disbursements. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-26 Cash Management

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

57. An authorized signing officer should sign a cheque only after reviewing the appropriate supporting documentation. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-26 Cash Management

58. Outstanding cheques that appear on a bank reconciliation are those cheques written during the current and previous periods that have not yet cleared the bank during the previous period. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-28 Reconciliation of the Cash Accounts and the Bank Statements

59. Deposits in transit to the bank have not been recorded in the depositor's books but they have been recorded by the bank. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-28 Reconciliation of the Cash Accounts and the Bank Statements

60. Journal entries made to update the cash account, after a bank reconciliation has been prepared, should affect the "Bank Statement" part of the reconciliation rather than the "Depositor's Books" part of the reconciliation. FALSE

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

61. Deposits in transit that appear on a bank reconciliation are those deposits that were made during the current month but which were not included by the bank on the current bank statement. TRUE

62. The responsibility for keeping the records for an asset should not be separate from the physical custody of that asset. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

63. When completing a bank reconciliation, bank service charges should be added to the cash balance appearing on the bank statement. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-28 Reconciliation of the Cash Accounts and the Bank Statements

64. When a company records adjusting entries following the completion of a bank reconciliation, the cash account is debited for the amount of any deposit in transit. FALSE

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

65. External auditors are temporary employees of the company being audited. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-26 Cash Management

66. A bank reconciliation compares the ending cash balance in the company's records to the ending cash balance reported by the bank on the monthly bank statement. TRUE

67. When using the percentage of completion method, revenue is recognized when work on the contract is completed. FALSE

68. Under the completed contracted method of accounting for long-term construction projects, revenue is not recognized until the project is complete and paid for. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-01 Apply the core revenue recognition principle to determine the accepted time to record sales revenue for typical manufacturers, wholesalers, retailers, and service companies. Topic: 06-02 Revenue Recognition for Bundled Goods and Services: A Five-Step Process

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Multiple Choice Questions 69. For sellers of goods, the revenue recognition principle generally requires that revenues be recorded when the following conditions are met: A. The item is manufactured B. The sales order is received C. When title and risks of ownership pass to the buyer. D. When the goods are received by the buy

70. When do most companies usually recognize revenue as earned and record the revenue? A. When the customer's order is received B. When title and risks of ownership pass to the buyer C. When the order is delivered D. When payment is received

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

71. Fluffy bottoms Inc. is an online children's clothing retailer. All items are shipped to customers FOB shipping and must be prepaid by the customer before any items are shipped. At what point should Fluffy bottoms recognize revenue? A. At the time of shipping B. When the goods reach the customer C. When payment is received D. When the goods are removed from inventory

72. Relax Shack is a giftware wholesaler. All orders are shipped FOB destination and paid for on delivery. When should Relax Shack recognize its revenues? A. At the time of shipping B. When the goods reach the customer C. When payment is received D. When the goods are removed from inventory

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

73. Carthage Caravans rents storage units. In the first month of operation, they collected cash and credit card receipts of $4,140 and during the month they rented thirty-six (36) storage units. All storage units rent out at $115.00 per month. They also received non-refundable deposits of $23.00 each on another five storage units. For two of those deposits the customers had not shown up, and the company did not refund the deposits; the other three deposits were for the following month. The appropriate amount for them to recognize as revenue for their first month is: A. $4,140 B. $4,163 C. $4,186 D. $4,255

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-01 Apply the core revenue recognition principle to determine the accepted time to record sales revenue for typical manufacturers, wholesalers, retailers, and service companies. Topic: 06-01 Accounting for Sales Revenue

74. A retail company accepts credit cards as payments for all the following reasons EXCEPT: A. To receive money faster B. Because the fee for the service is small compared to the benefits C. To avoid the costs of providing credit directly to customers D. To increase customer traffic at its stores.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

75. 401 Diner reported sales revenues of $53,000 in April. Thirty percent were cash sales and seventy percent were paid by credit cards. 401 Diner pays a three percent fee to the credit card companies. 401 Diner's net sales reported for April would be closest to: A. $16,050 B. $53,500 C. $51,887 D. $15,900 Cash ($53,000 ´ 30%) = $15,900 PLUS ($53,000 ´ 70% ´ 97%) = $35,987 Net sales = $51,887.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-04 Credit Card Sales to Customers Topic: 06-07 Reporting Net Sales

76. 401 Diner reported sales revenues of $53,000 in April. Thirty percent were cash sales and seventy percent were paid by credit cards. 401 Diner pays a three percent fee to the credit card companies. 401 Diner's credit card fees for April would be closest to: A. $1,113 B. $1,080 C. $1,590 D. $1,557 $53,000 ´ 70% ´ 3% = $1,113.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

77. A customer purchased a $200 item at Best Bike Shop, paying with a VISA credit card. The merchant is charged a 2% fee by VISA. When recording this sale, the merchant would do which of the following? A. Debit trade receivables for $200. B. Credit sales revenue for $200. C. Credit sales revenue for $196. D. Credit unearned sales revenue for $200.

78. Central Company sold goods for $5,000 to Western Company on March 12 on credit. Terms of the sale were 2/10, n/30. At the time of the sale, Central recorded the transaction by debiting trade receivables for $5,000 and crediting sales revenue for $5,000. Western paid the balance due, less the discount, on March 21. To record the March 21 transaction, Central would debit which of the following? A. Cash for $4,900. B. Trade receivables for $4,900. C. Cash for $5,000. D. Trade receivables for $5,000. Calculation: $5,000 ÷ 2% = 100 therefore the amount to be debited by Central Co $5,000 $100 = $4,900.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

79. On a multiple-step income statement, the line sales returns and allowances is: A. subtracted from net sales to determine gross margin on sales. B. subtracted from gross margin on sales to determine net sales. C. added in the calculation of cost of goods sold. D. subtracted from gross sales to determine net sales.

80. How should one interpret credit terms of 2/10, n/30? A. Two percent discount for early payment is available if the invoice is paid before the tenth day of the month following the month the sale. B. Two percent discount for early payment is available if the invoice is paid within ten days of the invoice date. C. Ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice. D. Two percent discount for early payment is available if the invoice is paid after the tenth day, but before the thirtieth day of the invoice date.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

81. On February 15, a local bakery receives an invoice for electricity used in the month of January and pays it on March 1. In which month should the bakery recognize the expense? A. January B. February C. March D. No expense should be recorded.

82. A customer purchased $2,000 of goods on credit from Holiday Party Supply on May 1. The customer received the bill on May 15 with a due date of May 30. The customer sent an etransfer of $2,000 on May 28. In recording this transaction, Holiday should credit Sales Revenue for $2,000 on which of the following dates? A. May 1. B. May 15. C. May 28. D. May 30.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

83. A sale should, not be recognized as revenue by the seller at the time of sale if A. payment was made by cheque. B. the selling price is less than the normal selling price. C. the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated. D. the buyer cannot return the product unless there it is defective, which rarely occurs.

84. When goods are sold to a customer with credit terms of 2/15, n/30, the customer will receive which of the following? A. A 15% discount if they pay within 2 days. B. A 2% discount if they pay 15% of the amount due within 30 days. C. A 15% discount if they pay within 30 days. D. A 2% discount if they pay within 15 days.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

85. Central Company sold goods for $5,000 to Western Company on March 12 on credit. Terms of the sale were 2/10, n/30. At the time of the sale, Central recorded the transaction by debiting Trade Receivables for $5,000 and crediting Sales Revenue for $5,000. Western paid the balance due on April 9. To record the April 9 transaction, Central would debit which of the following? A. Cash for $4,900. B. Trade Receivables for $5,000. C. Cash for $5,000. D. Sales discounts for $100.

86. Merchandise was sold on credit for $3,000, terms 1/10, n/30. The entry to record the cash collection should include which of the following? A. Debit Cash, $3,000, and credit Trade Receivables, $3,000, if collected within the discount period. B. Debit Cash, $3,000, and credit Trade Receivables, $2,970, and Sales Discount, $30, if collected within the discount period. C. Debit Cash, $3,000, and credit Trade Receivables, $2,970, and Sales Discount, $30, if collected after the discount period. D. Debit Cash, $3,000, and credit Trade Receivables, $3,000, if collected after the discount period.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

87. A credit sale of $2,500, terms 1/20, n/30, should be recorded with which of the following journal entries?

DR A B

C D

Trade receivables Sales revenue Allowance for discounts Accounts receivable Sales revenues Trade receivables Sales revenue Trade receivables Sales revenue Sales discount

CR 2,475 2,475 25 2,475 2,500 2,500 2,500 2,500 2,475 25

A. Choice A B. Choice B C. Choice C D. Choice D

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

88. A company had the following partial list of account balances at year-end:

Sales returns and allowances Trade receivables Sales discounts Sales revenues Allowance for doubtful accounts

$500 9,000 700 57,200 300

What amount of Net Sales would be shown on the income statement? A. $55,700. B. $56,000. C. $57,200. D. $64,200. Calculation: $57,200 - $500 - $700 = $56,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-05 Sales Discounts to Businesses Topic: 06-06 Sales Returns and Allowances Topic: 06-07 Reporting Net Sales

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

89. A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount. What is the approximate annual rate? A. 18%. B. 25%. C. 38%. D. 56%. Calculation: [($3 ÷ $97) ÷ 30 days] ´ 365 days = 38.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-05 Sales Discounts to Businesses

90. When credit terms for a sale are 2/15, n/40, the customer saves by paying the bill early. Approximately what percent would this savings amount to on an annual basis? A. 18%. B. 20%. C. 30%. D. 37%. Calculation: [($2 ÷ $98) ÷ 25 days] ´ 365 days = 30.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

91. What is the annual interest rate of a sales discount of 2/10, n/30? A. 24.3% B. 24.8% C. 36.5% D. 37.2% Calculation: [($2 ÷ $98) ÷ 20 days] ´ 365 days = 372.

92. Use 365 days in a year. If a company plans to borrow money at an annual rate of 16% in order to take a discount of 2/10, n/30 what would be the net advantage of this strategy? (Do not round intermediate calculations. Round your final percentage answer to 2 decimal places.) A. 8.3% B. 8.8% C. 20.5% D. 21.2% Calculation: {[($2 ÷ $98) ÷ 20 days] ´ 365 days} -.16 = 21.2%

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

93. Which of the following accounts is always treated as a contra revenue and not as a selling expense? A. Net sales B. Cash equivalents C. Sales returns and allowances D. Purchase returns and allowances

94. What is the impact of treating sales returns and allowances as a contra revenue but treating sales discounts and credit card discounts as selling expenses? A. Gross margin is reduced by sales returns and allowances, sales discounts and credit card discounts. B. Gross margin is reduced by sales returns and allowances but all three accounts cause a decrease in profit from operations. C. Gross margin is reduced by sales returns and allowance but operating profit is only reduced by sales discounts and credit card discounts. D. Gross margin is reduced by sales discounts and credit card discounts but all three accounts cause a decrease in profit from operations.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

95. In 20X3, T Co.'s gross profit percentage was 39.8% while their competitor, WWW's percentage was 31.8%. What was the most likely reason for WWW's lower percentage? A. Lower selling prices B. Lower product cost as a percentage of sales C. Ability to differentiate their product in consumers' eyes D. Higher selling prices

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

96. T Co's gross profit percentage has been increasing in the three years from 20X1 through 20X3 from 36.5% to 39.8%. This change has most likely been caused by which of the following? A. Higher product costs B. Selling products with lower margins C. Selling products for higher prices D. Discounted prices

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

97. A Co. and G Co. are competitors in the biotechnology market. In 20X3, A Co. reported a gross profit percentage of 86.3% while G Co's percentage was 80.7%. What is the most likely cause of G Co.'s lower gross profit percentage? A. Increased product selling prices B. Decreased product costs C. Smaller scale operations than A Co. D. Larger scale operations than A Co.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

98. G Co., which is a biotechnology firm, reported the following revenues on their 20X3 income statement: Product sales $582.2 million, Royalties $214.7 million, Contract revenue $107.0 million and Interest income $64.1 million. Their cost of sales was reported as $104.5 million. What was their gross profit percentage? A. 82.1% B. 86.9% C. 88.4% D. 89.2% Calculation: ($582.2 - $104.5) ÷ $582.2 = 821.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

99. In 20X3, C Co. reported net sales revenues of $19.8 billion and cost of goods sold for $6.0 billion. What was their gross profit percentage for 20X3? A. 30.3% B. 43.5% C. 69.7% D. 76.74% Calculation: ($19.8 - $6.0) ÷ $19.8 = 697.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

100. To record estimated uncollectible accounts using the allowance method for uncollectible accounts, the adjusting entry would be a debit to? A. Trade Accounts Receivable and a credit to Allowance for Doubtful Accounts. B. Bad Debts Expense and a credit to Allowance for Doubtful Accounts. C. Allowance for Doubtful Accounts and a credit to Trade Accounts Receivable. D. Loss on Credit Sales and a credit to Trade Accounts Receivable.

101. Which of the following statements is true about the allowance method for uncollectible accounts? A. The net realizable value of trade accounts receivable is greater before an account is written off than after it is written off. B. Bad Debts Expense is debited when a specific account is written off as uncollectible. C. The net realizable value of trade accounts receivable on the balance sheet is the same before and after an account is written off. D. Allowance for Doubtful Accounts is closed each year to Income Summary.

102. The balance in Allowance for Doubtful Accounts would have a debit balance when: A. it would never be the case. B. an uncollectible account is later recovered. C. write-offs during the year have been less than previous provisions. D. write-offs during the year have exceeded previous provisions.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

103. An aging of a company's trade receivables indicates that $6,500 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a A. debit to Bad Debts Expense for $6,500. B. debit to Bad Debts Expense for $5,300. C. debit to Allowance for Doubtful Accounts for $6,500. D. debit to Bad Debts Expense for $7,700.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-04 Estimate, record, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Topic: 06-10 Accounting for Bad Debts

104. If an account is collected after having been previously written off, A. the allowance account should be debited. B. only the control account needs to be credited. C. both statement of earnings and balance sheet accounts will be affected. D. there will be both a debit and a credit to trade accounts receivable.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

105. During 20X1, Norn Company recorded bad debt expense of $15,000 and wrote off an uncollectible trade receivable amounting to $5,000. Assuming a January 1, 20X1, credit balance in the allowance for doubtful accounts of $10,000, the December 31, 20X1, balance in the allowance account would be which of the following? A. $10,000. B. $15,000. C. $20,000. D. $25,000. Calculation: $10,000 + $15,000 - $5,000 = $20,000.

106. School Supplies Company made the following journal entries (1) to write off an account judged to be uncollectible and (2) to record bad debt expense for 20X1:

A B

DR CR 1,000 1,000 3,000 3,000

Allowance for doubtful accounts Trade receivables Bad debt expense Allowance for doubtful accounts

As a result of the first entry only, the book value (net realizable value) of trade receivables was A; as a result of the second entry only, the book value (net realizable value) of trade receivable was B:

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

A 1 2 3 4

Increased Decreased Unchanged Unchanged

B Decreased Decreased Unchanged Decreased

A. Choice 1 B. Choice 2 C. Choice 3 D. Choice 4

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 06-04 Estimate, record, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. Topic: 06-10 Accounting for Bad Debts

107. When an account is written off using the allowance method for uncollectible accounts, trade accounts receivable A. is unchanged and the allowance account increases. B. increases and the allowance account increases. C. decreases and the allowance account decreases. D. decreases and the allowance account increases.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

108. Tabor Company had trade receivables of $450,000 and an allowance for doubtful accounts of $15,500 just prior to writing off as worthless a trade receivable from Fox Company of $5,000. What was the net realizable value of trade receivables as shown by the accounting record before and after the write-off?

Before A) B) C) D)

After 450,000 15,000 434,500 434,500

450,000 439,500 429,500 434,500

A. Choice A B. Choice B C. Choice C D. Choice D Calculation: $450,000 - $15,500 = $434,500.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

109. Jackson Company uses the allowance method to account for bad debts. During 20X4, a customer became bankrupt and a receivable of $5,000 was deemed uncollectible. What is the entry to record the uncollectible amount?

A) B) C) D)

Allowance for doubtful accounts Trade receivables Bad debt expense Allowance for doubtful accounts Allowance for doubtful accounts Bad debt expense Loss on receivables Trade receivables

5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000

A. Choice A B. Choice B C. Choice C D. Choice D

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

110. The books of Tweed Company provided the following information: Beginning balances: Trade receivables $30,000 Allowances for doubtful accounts (a credit) $2,000 Transactions during the year: Sales revenue (of which 1/3 were on credit) $1,800,000 Collections on trade receivables $590,000 Accounts written off as uncollectible $2,500 Past collection experience has indicated that 1% of credit sales normally is not collected. Therefore, an adjusting entry for bad debt expense should be made in the amount of A. $500. B. $2,500. C. $6,000. D. $6,500. Calculation: ($1,800,000 ´ 1/3) ´ 1% = $6,000.

111. Under the allowance method for uncollectible accounts, when a specific account is written off A. total assets will be unchanged. B. net earnings will decrease. C. total assets will decrease. D. total assets will increase.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

112. Under the allowance method for uncollectible accounts, when a year-end adjustment is made for estimated uncollectible accounts, A. total assets decrease. B. total assets are unchanged. C. net earnings are unchanged. D. liabilities decrease.

113. SRM Company uses the allowance method to record its bad debt expense. When the account of a particular customer is deemed to be uncollectible and is written off, which of the following will be included in the journal entry? A. Debit to bad debt expense. B. Credit to bad debt expense. C. Debit to allowance for doubtful accounts. D. Debit to trade receivables.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

114. Prior to the write off of a $30 customer account, Kraft Company had the following account balances:

Trade receivables Allowance for doubtful accounts

$9,800 Debit balance $500 Credit balance

What was the net realizable value of the receivables before and after the write-off?

Before A) B) C) D)

After $9,300 $9,400 $9,800 $9,800

$9,300 $9,270 $9,770 $9,800

A. Choice A B. Choice B C. Choice C D. Choice D

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

115. In recording the year-end adjusting entry for bad debt expense, a company would do which of the following? A. Debit trade receivables. B. Credit trade receivables. C. Credit allowance for doubtful accounts. D. Debit allowance for doubtful accounts.

116. If a customer pays her bill after her account has already been written off, the company receiving the payment should record the account reinstatement with which of the following? A. A credit to bad debt expense. B. A credit to allowance for doubtful accounts. C. A credit to cash. D. A debit to bad debt expense.

Liberty Company estimates that its annual bad debts approximate 4% of credit sales. Liberty had the following balances at year-end prior to recording adjusting entries: Credit Sales $160,000 Trade Receivables $30,000 Allowance for Doubtful Accounts $100 (debit balance)

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

117. On Liberty's income statement for the year, what would bad debt expense amount to? A. $5,200. B. $6,300. C. $6,400. D. $6,500. Calculation: $160,000 ´ 4% = $6,400.

118. Liberty estimates that its annual bad debts approximate 4% of credit sales. What would the net realizable value of the receivables on Liberty's year-end balance sheet be? A. $23,500. B. $23,600. C. $23,700. D. $29,900. Calculation: $30,000 - (-$100 + $6,400) = $23,700.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

119. Following the completion of an aging analysis, the accountant for Liberty estimated that $1,100 of the receivables would be uncollectible. The year-end adjusting entry to record bad debt expense would include which of the following? A. Credit to allowance for doubtful accounts of $1,100. B. Credit to allowance for doubtful accounts of $1,200. C. Debit to bad debt expense of $1,000. D. Debit to bad debt expense of $900. Calculation: $100 + $1,100 = $1,200.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivables turnover ratio and the effects of accounts receivable on cash flows. Topic: 06-16 Estimating Bad Debts

120. Following the completion of an aging analysis, the accountant for Liberty estimated that $1,100 of the receivables would be uncollectible. What would be the net realizable value of the receivables on Liberty's year-end balance sheet? A. $28,800. B. $28,900. C. $29,900. D. $30,100. Calculation: $30,000 - $1,100 = $28,900.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

121. When using the allowance method for bad debts, how should bad debt expense be recorded? A. As an adjusting entry at the end of the accounting period. B. When a particular account is written off. C. Whenever the allowance for doubtful accounts has a debit balance. D. Whenever the allowance for doubtful accounts has a zero balance.

122. Which of the following is true about bad debt expense? A. It should appear on the statement of financial position as a contra asset. B. It should appear on the income statement as a contra revenue. C. It should appear on the income statement as part of selling expenses. D. It should not appear in the financial statements.

123. The total trade receivable of $4,000 had previously been written off as a bad debt. After considering the journal entry or entries that the company will make to record the recovery, what will be the net effect on accounts receivable? A. Accounts receivable will increase by $400 B. Accounts receivable will decrease by $3,600 C. The effect on accounts receivable is zero D. Accounts receivable will decrease by $400

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Springtime Company recorded $3,500,000 in credit sales in 20X1 and prepared the following aging schedule of their $730,000 in accounts receivable as at December 31, 20X1:

Days outstanding

Balance

0 - 30 days 31-60 days 61-90 days over 90 days

Estimated percentage uncollectible $350,000 275,000 67,500 37,500

1% 2% 5% 25%

The balance in their allowance for doubtful accounts before year-end adjustments is a $2,000 credit.

124. The bad debt expense for 20X1 is: A. $21,750 B. $23,750 C. $19,750 D. $35,000 ($350,000 ´ 1%) + ($275,000 ´ 2%) + ($67,500 ´ 5%) + ($37,500 ´ 25%) = $21,750 - $2,000 = $19,750.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

125. The balance in the allowance for doubtful accounts after year-end adjustments will be A. $2,000 B. $23,750 C. $21,750 D. $19,750 $21,750.

126. Upon completing an aging analysis of trade receivables, the accountant for Rosco Works estimated that $5,000 of the current $98,000 of trade receivables would be uncollectible. The allowance for doubtful accounts had a $400 credit balance at year-end prior to adjustment. What amount of bad debt expense should appear in Rosco's income statement for the year? A. $0 B. $4,600. C. $5,000. D. $5,400. Calculation: $5,000 - $400 = $4,600.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

127. For the year ended December 31, 20X0, Barracks and Bullets Emporium estimated its allowance for doubtful accounts using the year-end aging of accounts receivable. The following data are available

Allowance for doubtful accounts, Jan 1 20X0 Estimated uncollectible accounts during 20X0 (1% on credit sales of $4,000,000) Uncollectible accounts written off, Nov 30 20X0 Estimated uncollectible accounts per aging, Dec 31 20X0

$37,000 $40,000 $52,000 $74,000

After year-end adjustment, the bad debt expense for 20X0 should be A. $89,000 B. $37,000 C. $126,000 D. $52,000 Beg AFDA $37,000 - amt written off in Nov $52,000 = -$15,000. + bad debt expense = End AFDA $74,000. Therefore bad debt expense = $74,000 - (-$15,000) = $89,000.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

128. In 20X3, T Co. reported a receivables turnover ratio of 11.1 and their competitor, WWW Co., reported a ratio of 4.6. Which of the following is true? A. T Co. needs to decrease their ratio in order to improve collection time B. WWW Co. has done a better job of collecting their receivables than T Co. C. WWW Co. needs to focus on improving their credit and collection process D. T Co has a better inventory management than WWW Co.

129. In 20X3, G CO. reported product sales of $717.8 million and trade receivables of $79.4 million. In 20X2, product sales were $584.9 million and trade receivables were $71.4 million. What was its receivables turnover ratio for 20X3? A. 8.19 B. 8.64 C. 9.04 D. 9.52 Calculation: $717.8 ÷ {($79.4 + $71.4) ÷ 2} = 9.52.

130. A high receivables turnover ratio indicates A. the company's sales are increasing. B. customers are making payments very quickly. C. customers are making payments slowly. D. a large proportion of the company's sales are on credit.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

131. If C Co.'s trade receivables balance was $1,666 million in 20X2 and $1,798 million in 20X3, what would be the impact on the statement of cash flows? A. A decrease in cash flow from investing activities B. An increase in cash flow from operating activities C. An increase in cash flow from investing activities D. A decrease in cash flow from operating activities

132. In 20X3, A Co. reported product sales revenue of $2,514.4 million and trade receivables of $319.9 million for 20X3 and $269.0 million in 20X2. What was the cash flow generated by sales? A. $2,194.5 million B. $2,463.5 million C. $2,514.4 million D. $2,565.3 million Calculation: $2,514.4 - ($319.9 - $269) = $2,463.5.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

133. Profit for T Co. in 20X3 was $59,156 (in thousands). There was a deduction from profit on the statement of cash flows for $2,781 (in thousands) for the change in trade receivables. The trade receivables balance on December 31, 20X3 was $79,024 (in thousands). How much was the trade receivables balance on December 31, 20X2? A. $56,375 B. $61,937 C. $76,243 D. $81,805 Calculation: $79,024 - $2,781 = $76,243.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 06-05 Analyze and interpret the receivables turnover ratio and the effects of accounts receivable on cash flows. Topic: 06-23 Control over Accounts Receivable

134. The WD Co. reported revenue of $23,402 million for 20X3. Their trade receivables balance was $3,999 million in 20X3 and $3,633 million in 20X2. How much cash was collected from customers? A. $23,036 B. $23,306 C. $23,402 D. $23,768 Calculation: $23,402 - ($3,999 - $3,633) = $23,036.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

135. For accounting purposes, cash includes which of the following? A. IOU's received from employees. B. A post-dated cheque received from a customer. C. Balances on deposit in banks. D. A note received from a customer in settlement of an overdue trade account receivable.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-25 Cash and Cash Equivalents Defined

136. On the April 30 bank reconciliation, a deposit made by a company to its bank account on April 18 will appear as a(n) A. addition to the balance per books. B. deduction from the balance per books. C. deduction from the balance per bank. D. this will not affect the current period's bank reconciliation.

137. Which of the following is not a reconciling item when preparing a bank reconciliation? A. Bank service charges not recorded by the corporation. B. Outstanding cheques. C. Interest collected on a note receivable by the bank and recorded by the corporation. D. Outstanding deposits.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

138. An NSF cheque should appear in which section of the bank reconciliation? A. Addition to the balance per books. B. Deduction from the balance per books. C. Addition to the balance per bank. D. Deduction from the balance per bank.

139. On a bank reconciliation, which of the following would be deducted from the balance per bank? A. Outstanding cheques. B. Deposits in transit. C. Electronic payment by a customer on account. D. Bank service charges.

140. Outstanding cheques from the prior period which clear the bank in the current period A. should be added to the balance per books. B. should be deducted from the balance per books. C. should be deducted from the balance per bank. D. do not affect the current period's bank reconciliation.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

141. If a cheque correctly written and paid by the bank for $521 is incorrectly recorded on the company's books for $251, the appropriate treatment on the bank reconciliation would be to A. add $270 to the balance per bank. B. add $270 to the balance per books. C. deduct $270 from the balance per books. D. deduct $270 from the balance per bank.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-28 Reconciliation of the Cash Accounts and the Bank Statements

142. On Eli Corp's June bank reconciliation, cheques outstanding totaled $5,400. In July, the corporation issued cheques totaling $38,900. The July bank statement shows that $26,300 in cheques cleared the bank in July. A cheque from one of Eli Corp's customers in the amount of $300 was also returned marked "NSF." The amount of outstanding cheques on Eli's July bank reconciliation should be A. $7,200. B. $12,600. C. $17,700. D. $18,000. $5,400 + $38,900 - $26300 = $18,000.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

143. To aid internal control, the individual authorized to sign cheques should be which of the following? A. Supervisor of receiving. B. Accounts payable bookkeeper. C. Treasurer. D. Purchasing agent.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

144. Cash equivalents typically include investments with original maturities of which of the following? A. One month or less. B. Three months or less. C. One year or less. D. One year or the operating cycle, whichever is longer.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-25 Cash and Cash Equivalents Defined

145. Which of the following would not be considered an element of good internal control? A. Require monthly reconciliation of bank accounts with the cash account. B. Require that all cash receipts be deposited on a daily basis. C. Require that the individual who handles cash receipts be responsible for the accounting function related to those funds. D. Require that approval for cash payments and the signing of cheques be assigned to different individuals.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

146. Which of the following is required for effective control of cash? A. One person handles the receipts and disbursements of cash. B. Cheques be pre-numbered. C. Cash be deposited monthly in a bank. D. A reconciliation of the bank balance with the cash balance be prepared twice a year.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

147. Vida Corporation gathered the following reconciling information in preparing its July bank reconciliation:

Cash balance per books, July 31 Deposits in transit Electronic collection of account receivable Bank charge for cheque printing Outstanding cheques NSF cheque

$3,500 150 850 20 2,000 170

The adjusted cash balance per books at July 31 is A. $4,160. B. $4,010. C. $2,460. D. $2,310. Calculation: $3,500 + $850 - $20 - $170 = $4,160.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-28 Reconciliation of the Cash Accounts and the Bank Statements

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

148. Cawthra Limited gathered the following reconciling information in preparing its June bank reconciliation:

Cash balance per books, June 30 Electronic collection of account Outstanding cheques Deposits in transit Bank service charge NSF cheque

$12,000 6,000 9,000 4,500 75 1,200

The adjusted cash balance per books at June 30 is A. $8,775. B. $12,000. C. $16,500. D. $16,725. Calculation: $12,000 + $6000 - $75 - $1200 = $16,725.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

149. Dobson Corporation gathered the following reconciling information in preparing its September bank reconciliation:

Cash balance per books, September 30 Note receivable collected by bank Outstanding cheques Deposits in transit Bank service charge NSF cheque

$11,000 6,000 9,000 4,500 75 1,200

The adjusted cash balance per bank at September 30 is A. $1,775. B. $6,500. C. $9,725. D. $15,500. Calculation: $11,000 + $4,500 - $9,000 = $6,500.

150. Bank errors A. occur because of time lags. B. must be corrected by debits. C. are infrequent in occurrence. D. are corrected by making an adjusting entry on the depositor's books.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-28 Reconciliation of the Cash Accounts and the Bank Statements

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

151. When preparing a bank reconciliation, which of the following would be deducted from the company's cash balance? A. Note receivable collected by the bank. B. Deposits in transit. C. Outstanding cheques. D. Bank service charges.

152. The following information was available to the accountant of Midland Company when preparing the monthly bank reconciliation:

Outstanding cheques: Bank service charges Deposits in transit Customer note receivable collected by bank Cash balance per bank statement Cash balance per books (prior to reconciliation)

#643 for $502 #651 for $43 $25 $190 $500 $975 $145

What is the corrected cash balance per books following completion of the reconciliation? A. $120. B. $430. C. $620. D. $645. Calculation: $145 - $25 + $500 = $620.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

153. The following information was available to the accountant of Dove Company when preparing the monthly bank reconciliation:

Cash balance per bank Outstanding cheques NSF cheque returned with the bank statement Deposits in transit Bank service charges Notes receivable from customer, collected by bank Error: cash payment of $532 received from a customer was incorrectly recorded on the books as

What was the cash balance per books of Dove Company prior to beginning the bank reconciliation? A. $2,238. B. $2,270. C. $2,336. D. $2,354. Calculation: $3,450 - $972 + $351 + $58 + $33 - $575 - $9 = $2,336.

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$3,450 972 58 351 33 575 523

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

154. Under the completed contract method, revenue is recognized A. periodically as work is completed. B. when the initial contract is signed. C. when the customer pays. D. when the product is delivered to the customer.

155. When is revenue recognized under the completed contract method? A. When construction begins on the project. B. When the project is complete. C. Throughout the project as cash payments are received from the customer. D. Throughout the project as bills are sent to the customer.

156. Under the percentage of completion method, the amount of work completed in a particular year is typically determined by comparing which of the following? A. The costs incurred that year divided by the estimated total costs of the project. B. The cost incurred that year divided by the contract price. C. The total costs incurred to date divided by the contract price. D. The total costs incurred to date divided by the cash collected to date from the customer.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

157. When the outcome of a construction contract cannot be estimated reliably, but it is probable that the costs can be collected, the amount of revenue recognized each period is calculated based on A. the percentage of completion method. B. the completed contract method. C. the zero profit method. D. no revenue should be recognized until cash is collected.

158. If a company uses the completed contract method rather than the percentage of completion method, the total profit the company recognizes from the beginning of the project throughout its completion will be which of the following? A. Greater if the completed contract method is used. B. Greater if the percentage of-completion method is used. C. The same for both methods. D. Greater for the completed-contract method only if the project takes longer than five years to complete.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Short Answer Questions 159. The December 31, 20X3 statement of financial position of Howson Limited showed Trade Accounts Receivable of $450,000 and a credit balance in Allowance for Doubtful Accounts of $45,000. During 20X3, the following transactions occurred: service revenue billed on account, $1,500,000; collections from customers, $1,300,000; accounts written off $37,000; previously written off accounts of $4,000 were collected. Required: (a) Record the 20X3 transactions. (b) If the company uses the percentage of receivables basis to estimate bad debts expense and determines that uncollectible accounts are expected to be 5% of trade accounts receivable, what is the adjusting entry at December 31, 20X3? (a) DR CR Trade Accounts Receivable 1,500,000 Service Revenue (To record credit service revenue) 1,500,000 Cash 1,300,000 Trade Accounts Receivable (To record collection of receivables) 1,300,000 Allowance for Doubtful Accounts 37,000 Accounts Receivable (To write off specific accounts) 37,000 Trade Accounts Receivable 4,000 Allowance for Doubtful Accounts (To reverse write-off of account) 4,000 Cash 4,000 Trade Accounts Receivable (To record collection of account) 4,000

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(b) TRADE ACCOUNTS RECEIVABLE 450,000 1,500,000 1,300,000 4,000 37,000 4,000 Bal. 613,000

ALLOWANCE FOR DOUBTFUL ACCOUNTS 37,000 45,000 4,000 12,000 Bal.

Required balance ($613,000 × .05) $30,650 Balance before adjustment 12,000 Adjustment required $18,650

Dec 31 Bad Debts Expense 18,650 Allowance for Doubtful Accounts 18,650

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

160. Eddie Corporation uses the allowance method for estimating uncollectible accounts. Required: Prepare entries to record the following transactions:

January 5 April 15 August 21 October 5

Sold merchandise to Tonya Holmes for $1,500, terms n/15. The merchandise sold cost $900. Received $500 from Tonya Holmes on account. Wrote off as uncollectible the balance of the Tonya Holmes account when she declared bankruptcy. Received a cheque for $350 from Tonya Holmes. No further collections are expected.

Please review the following information:

January 5

Trade Accounts Receivable - T. Holmes 1,500 Sales 1,500 Cost of Goods Sold 900 Merchandise Inventory 900 April 15 Cash 500 Trade Accounts Receivable - T. Holmes 500 August 21 Allowances for Doubtful Accounts 1,000 Trade Accounts Receivable - T. Holmes 1,000 October 5 Trade Accounts Receivable - T. Holmes 350 Allowance for Doubtful Accounts 350 Cash 350 Trade Accounts Receivable - T. Holmes 350

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

161. On June 1, 20X2, Budget Appliance Company sold merchandise on credit at an invoice price of $1,000; terms 2/10, n/30. Give the journal entries to record the following: A. To record the sale. B. Scenario 1: To record collection on June 28, 20X2. C. Scenario 2: To record collection on June 9, 20X2. Please review the following information:

Trade receivables 1,000 Sales revenue 1,000 Scenario 1. Cash 1,000 Trade receivables 1,000 Scenario 2 Cash 980 Sales discount 20 Trade receivables 1,000

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

162. Robertson's Toy World sells a variety of toys at discount prices. The following transactions occurred on May 16. Consider credit card discount a selling expense.

A. B. C. D.

Sold a bike for $95 each. Sold a $359 swing set; customer will be billed at the end of the month. Customer returned a $45 doll that had been purchased for cash on May 12; gave customer a cash refund. Sold a pair of $100 roller blades; customer paid with a credit card. The credit card company charges Robertson a 2% fee for this service.

Required: a. Present journal entries for each of the above transactions. b. Compute the net sales for the day. Please review the following information:

A. Cash 95 Sales revenue 95 B. Trade receivables 359 Sales revenue 359 C. Sales returns and allowances 45 Cash 45 D. Cash 98 Credit card discounts 2 Sales revenue 100

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

If credit card discounts are considered as an operating expense account: Net Sales = Sales revenue - sales returns and allowances $509 = (95 + 359 + 100) - 45

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-05 Sales Discounts to Businesses Topic: 06-07 Reporting Net Sales

163. Northern Company sold $4,000 of goods to Southern Company on credit on May 1. At the time of the sale, Northern recorded a debit to Trade Receivables and a credit to Sales Revenue for $4,000. Terms were 2/10, n/30. Required: Present the entries Northern would record for each of the following independent situations: A. Southern paid the balance due, less the discount, on May 10. B. Southern returned half of the goods for credit on May 4. Paid the balance due, less the discount, on May 10. C. Southern paid their bill on May 30 (there were no returns). Please review the following information:

A. Cash Sales discounts Trade receivables B. Sales returns and allowances Trade receivables Cash Sales discounts Trade receivables C. Cash Trade receivables

3,920 80 4,000 2,000 2,000 1,960 40 2,000 4,000 4,000

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-05 Sales Discounts to Businesses Topic: 06-06 Sales Returns and Allowances Topic: 06-07 Reporting Net Sales

164. A portion of the statement of earnings for Tea Company is shown below. Provide the missing account titles and amounts.

A. ____ $110,000 Sales returns and allowances B. _____ C. _____ $100,000 D. _____ _____ Gross Margin $25,000

A. Sales revenue B. $110,000 - $100,000 = $10,000 C. Net sales D. Cost of goods sold; $100,000 - $25,000 = $75,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-06 Sales Returns and Allowances Topic: 06-07 Reporting Net Sales

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

165. On July 10, 20X2, Mighty Company sold merchandise at an invoice price of $5,000 with terms of 3/10, n/30. Give the journal entries required below by indicating the account code of the appropriate account for each debit and credit and the amounts involved. Code Item A Cash B Trade Receivables C Sales Revenue D Sales Discounts

Transaction

Debits Credits Code Amount Code Amount

Sale on July, 20X7 Assumption A: Collection of the account on August 9, 20X7 Assumption B: Collection of the account on July 18, 20X7

Please review the following information:

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Transaction

Debits Credits Code Amount Code Amount Sale on July, B $5,000 C $5,000 20X7 Assumption A $5,000 B $5,000 A: Collection of the account on August 9, 20X7 Assumption A D $4,850 $5,000 B: 150 Collection of the account on July 18, 20X7

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

166. A portion of the statement of earnings for Sun Company is shown below. Provide the missing account titles and amounts.

A. _____ $190,000 Sales discounts $20,000 Net sales B. _____ Cost of goods sold $100,000 C. _____ D. _____

A. Sales revenue B. $190,000 - $20,000 = $170,000 C. Gross margin D. $170,000 - $100,000 = $70,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-06 Sales Returns and Allowances Topic: 06-07 Reporting Net Sales

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

167. Indicate whether each of the accounts listed below normally will have a debit or a credit balance. Record your answer to the left of each account by entering either Dr or Cr. ____ 1. Allowance for doubtful accounts ____ 2. Bad debt expense ____ 3. Sales returns and allowances ____ 4. Deferred revenue ____ 5. Sales discounts ____ 6. Notes receivable ____ 7. Sales revenue ____ 8. Short-term investments 1. Cr; 2. Dr; 3. Dr; 4. Cr; 5. Dr; 6. Dr; 7. Cr; 8. Dr

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Easy Learning Objective: 06-02 Analyze and interpret the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. Topic: 06-05 Sales Discounts to Businesses Topic: 06-06 Sales Returns and Allowances Topic: 06-07 Reporting Net Sales

168. Is it possible to have a debit balance for the AFDA account? If so, describe what likely caused this to happen and how one should proceed going forward. Yes, it is possible. Typically, AFDA will have a credit balance when first set up. When the write-offs that take place are greater than the amount allocated to this allowance account, it will have a debit balance. This happens when you underestimate the amount of bad debt expense in the period before. In order to resume normalcy, the account is credited an amount larger than otherwise to capture the previous underestimation. This of course has the effect of enlarging this period's bad debt expense.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

169. The following information comes from P Co.'s statements of earnings for 20X7 and 20X6:

(In millions) 20X7 20X6 Net sales $22,348 $20,917 Cost of sales $9,330 $8,525

1. Compute the gross profit percentage for a. 20X7 __________ b. 20X6 __________ 2. Provide at least two potential reasons for the change in P Co's gross profit percentage. (1) a. 58.3% (13,018/22,348), b. 59.2% (12,392/20,917), (2) P Co. may have discounted their selling prices to meet competition, increasing costs of producing their product, a change in the sales mix of their products toward selling more of the lower margin products, inventory losses and/or higher storage costs caused by poor management control.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

170. "Toys 4 U" has reported the following information on their income statements for the years 20X3 through 20X7:

20X7 20X6 20X5 20X4 20X3 Net Sales $11,170 $11,038 $9,932 $9,427 $8,746 Cost of Goods Sold 8,191 7,710 6,892 6,592 6,008

1. Compute the gross profit percentage for a. 20X7 ___________ b. 20X6 ___________ c. 20X5 ___________ d. 20X4 ___________ e. 20X3 ___________ 2. Has the gross profit ratio for "Toys 4 U" improved over time or worsened? Explain your reason. 1 a. 26.7% (2,979/11,170), b. 30.2% (3,328/11,038), c. 30.6% (3,040/9,932), d. 30.1% (2,835/9,427), e. 31.3% (2,738/8,746). 2 The gross profit has been steadily falling between 20X8 and 20X1. However, in 20X7, "Toys 4 U" gross profit ratio took a sharp and severe drop of 3.5% from 20X6. Therefore, the ratio has worsened over time with a severe drop occurring in the most recent year.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

171. Near the end of 20X6, the ledger of Dice Company included the following accounts and balances:

Allowance for Doubtful Accts Bad Debt Expense Trade Receivables

$800 credit balance 0 balance 50,000 debit balance

Cash collections on trade receivables during 20X6 amounted to $148,500. Sales revenue during 20X6 amounted to $200,000, of which 75% was on credit, and it was estimated that 2% of the credit sales made in 20X6 would ultimately become uncollectible. Before adjusting entries were made for 20X6, (a) a $600 account was determined to be uncollectible and written off by Dice and (b) bad debt expense was recorded to 20X6. These adjustments are not reflected in the account balances above. After the above entries were posted to the ledger, the account balances were as follows (give the amount under the appropriate debit or credit column):

Transaction Allowance for Doubtful Accounts Bad Debt Expense Trade Receivables

Debit

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Credit

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Please review the following information:

A B C

Transaction Allowance for Doubtful Accounts 800 + 3,000 - 600 Bad Debt Expense 150,000 × 2% Trade Receivables 50,000 - 148,500 + (200,000 × 74%) - 600

Debit

Credit $3,200

$3,000 50,900

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

172. On December 31, 20X1, Carter Corporation had the following account balances related to credit sales and receivables prior to recording adjusting entries:

Trade receivables Allowance for doubtful accounts Sales revenue (all credit sales)

$25,000 $200 (credit) $400,000

Required: Present the necessary year-end adjusting entry related to uncollectible accounts for each of the following independent assumptions: A. An aging of accounts receivable is completed. It is estimated that $1,950 of the receivables outstanding at year-end will be uncollectible. B. It is estimated that .5% of credit sales for the year will prove to be uncollectible. C. Assume the same information presented in (A) above except that prior to adjustment, the Allowance for doubtful accounts had a debit balance of $200 rather than a credit balance of $200. Please review the following information:

A. B. C.

Bad debt expense Allowance for doubtful accounts Bad debt expense Allowance for doubtful accounts Bad debt expense Allowance for doubtful accounts

1,750 1,750 2,000 2,000 2,150 2,150

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

173. Yahoo! Inc. reported the following figures from their financial statements for the years 20X0 through 20X2: (In thousands)

Net revenues Gross profit Profit (loss) Cash flow from operations Trade receivables

20X2 $203,270 176,528 25,588 110,278

20X1 $70,450 59,565 (25,520) 480

20X0 $21,490 16,768 (6,427) (2,394)

24,831

11,163

4,648

Calculate the gross profit ratio for all three years: a. 20X2 __________ b. 20X1 __________ c. 20X0 __________ a. 86.8% (176,528/203,270), b. 84.5% (59,565/70,450), c. 78.0% (16,768/21,490)

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 06-03 Analyze and interpret the gross profit percentage. Topic: 06-07 Reporting Net Sales

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

174. A recent annual report for C&L Co. contained the following data:

2019 Trade receivables Less: Allowance for Doubtful Accounts Net trade receivables Net sales (assume all are on credit)

2018 $1,798 12

$1,666 10

1,786 $19,805

1,656

1. Calculate the receivables turnover ratio and average collection period for both years: a. Receivables turnover b. Average collection period 2. What do these results indicate? 1. a. 11.51 (19,805/1,721) b. 31.7 days (365 days/11.51), 2. The turnover ratio indicates the number of times on average that the receivables are collected while the average collection period shows the length of time in days it takes the company to collect its receivables from the credit customers. The higher the turnover ratio, the less days it takes to collect our receivables, thereby increasing liquidity of the receivables.

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 06-05 Analyze and interpret the receivables turnover ratio and the effects of accounts receivable on cash flows. Topic: 06-22 Internal Control and Management Responsibility

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

175. During 20X1, Lau Inc. recorded credit sales of $1,500,000. Based on prior experience, it estimates a 1 percent bad debt rate on credit sales. At the beginning of the year, the balance in trade receivables, net was $100,000. At the end of the year, but before the bad debt expense adjustment was recorded and before any bad debts had been written off, the balance in trade receivables, net was $125,000. 1. Assume that on December 31, 20X1, the appropriate bad debt expense adjustment was recorded for the year 20X1 and trade receivables totaling $10,000 were written off for the year, what was the receivables turnover ratio for the year? 2. Assume that on December 31, 20X1, the appropriate bad debt expense adjustment was recorded for the year 20X1 and trade receivables totaling $12,000 were written off for the year, what was the receivables turnover ratio for the year? 3. Explain why the answers to parts 1 and 2 differ or do not differ. 1. 14.29 ($1,500,000/ [100,000 + 110,000]/2), 2. 14.29 (same calculation), 3. The ratio stayed the same because only the adjusting entry affects the balance of trade receivables, net while the actual write off of customer accounts simply offset the asset against the contra asset account so that net receivables do not change.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

176. Mephisto Inc. generated $2.75 million in credit sales during the current year. The balance of the allowance for doubtful accounts at December 31 is $2,500 debit. Accounts receivable at December 31 consists of the following:

Account Classification

Amount

1-30 days 31-60 days 61-90 days Over 90 days

$350,000 180,000 55,000 21,000

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Estimated Percentage Uncollectible 1.5% 3% 5% 25%

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Required: Calculate and record the journal entry for bad debt expense for the current year using the aging of accounts receivable approach. Mephisto has decided to write off $15,000 of the accounts that were over 90 days old. Record the journal entry. What is the balance for Accounts Receivable as shown on the December 31 balance sheet? One of the customers whose $2,200 account was written off paid in full. Record the journal entry. (entries) Is the balance in the allowance for doubtful accounts affected by the transaction in part d? If so, by how much? What is the new balance? a. Required balance for allowance for doubtful accounts

1-30 days 31-60 days 61-90 days Over 90 days

$350,000 1.5% $5,250 180,000 3% 5,400 55,000 5% 2,750 21,000 25% 5,250 $18,650 existing balance in the account 2,500 entry required to bad debt expense $21,150 Bad debt expense Allowance for doubtful accounts

21,150 21,150

b. Allowance for doubtful accounts 15,000 Accounts receivable 15,000

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

c. Accounts receivable ($606,000 - $15,000) 591,000 Less allowance for doubtful accounts (18,650 - 15,000) - 3,650 Net accounts receivable 587,350

d. Accounts receivable 2,200 Allowance for doubtful accounts 2,200 Cash Accounts receivable

2,200 2,200

e. The allowance for doubtful accounts balance would increase by $2,200, the new credit balance would be $5,850.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

177. The cash records of Kupper Corp show the following: 1. The June 30 bank reconciliation indicated that deposits in transit totaled $300. During July, the general ledger account, Cash, shows deposits of $9,700, but the bank statement indicates that only $9,540 in deposits were received during the month. 2. The June 30 bank reconciliation also reported outstanding cheques of $1,800. During July, Kupper Corp's books show that $11,170 of cheques were issued, yet the bank statement showed that $11,500 of cheques cleared the bank in July. There were no bank debit or credit memoranda and no errors were made by either the bank or Kupper Corp. Required: (a) Calculate the dollar amount of the deposits in transit at July 31. (b) Calculate the dollar amount of the outstanding cheques at July 31. (a) Deposits in transit:

Deposits per books in July

$9,700

Deposits per the bank in July

$9,540

Less: June 30 deposits in transit

300

July receipts deposited in July

9,240

Deposits in transit, July 31

$460

(b) Outstanding cheques:

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Cheques per books in July $11,170 Cheques clearing the bank in July $11,500 Less: Outstanding cheques, June 30 1,800 July cheques clearing in July 9,700 Outstanding cheques, July 31 $1,470

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Hard Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-28 Reconciliation of the Cash Accounts and the Bank Statements

178. Why is the reconciliation of a company's cash account to the bank statement so important for effective internal control for cash? The reconciliation of the cash account is very important in determining the correct, up-to-date balance for cash to be presented on the company's statement of financial position. It is also a good tool for detecting errors in the cash account because it is a second and independent record of the company's cash

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

179. The records of Topper. Ltd. show the following: 1. In February, deposits per the bank statement totaled $18,850; deposits per books $19,500; and deposits in transit at February 28 were $1,400. 2. In February, cheques issued per books were $17,750; cheques clearing the bank were $18,400; and outstanding cheques at February 28 were $1,250. There were no bank debit or credit memoranda and no errors were made by either the bank or Topper Ltd. Required: (a)Calculate the dollar amount of the deposits in transit at January 31. (b)Calculate the dollar amount of the outstanding cheques at January 31. (a) Deposits in transit:

Deposits per bank statement in February Add: Deposits in transit, February 28 Total deposits to be accounted for Less: Deposits per books Deposits in transit, January 31

$18,850 1,400 20,250 19,500 $750

(b) Outstanding cheques:

Cheques clearing the bank in February Add: Outstanding cheques, February 28 Total cheques to be accounted for Less: Cheques issued per books Outstanding cheques, January 31

$18,400 1,250 19,650 17,750 $1,900

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

180. You have recently started a part time job in the accounting department of Burris Limited. The accountant, Ted Landry, had prepared the company's bank reconciliation for June 20X3. After completing the reconciliation, he made the following journal entry:

June 30

Cash Bank Charges Expense Accounts Receivable ($3,000 collection less $500 NSF) Interest Earned

2,390 124 2,500 14

Ted was reviewing the bank reconciliation with you when, unfortunately, you spilled your coffee on it. He asks you to rewrite the reconciliation, in good form. He remembers that the only outstanding deposit was the last deposit for the month. You check the general ledger and the bank balance at June 30 was $24,527 (credit). You also check the bank statement and the balance was $22,314 (credit, i.e. overdrawn). You look up the last deposit for the month-it was for $21,789. Required: Using the above information prepare, in good form, the bank reconciliation for Burris Limited for June. BURRIS LIMITED Bank Reconciliation June 30, 20X3

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Cash balance per bank Add: Deposit in transit Less: Outstanding cheques (see note below) Adjusted cash per bank Cash balance per books Add: Electronic collection of account Interest earned Less: Bank service charge NSF cheque Adjusted cash balance per books

$(22,314) 21,789 (525) 21,612 $(22,137) $(24,527) $3,000 14 $124 500

3,014 (21,513) 624 $(22,137)

Note: To solve, you complete the bank reconciliation with the information you know-the outstanding cheques and the adjusted cash per bank will be unknown. After you arrive at the adjusted balance per books, you enter this as the adjusted cash per bank and solve for the outstanding cheques.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

181. Indicate the effect on a monthly bank reconciliation of each of the items listed below by placing the appropriate letter to the left of each item. A. Addition to the balance in the company's Cash account. B. Deduction from the balance in the company's Cash account. C. Addition to the balance on the bank statement. D. Deduction from the balance on the bank statement. E. Does not affect the reconciliation.

_____ 1.

The monthly service fee charged by the bank. _____ 2. Another company's cheque erroneously charged against the company's bank balance on the bank statement. _____ 3. A customer's cheque returned by the bank marked NSF. _____ 4. A deposit in transit. _____ 5. A note collected by the bank during the month on behalf of the company. _____ 6. An outstanding cheque. _____ 7. The company recorded a cheque as a credit to its cash account in the books. The cheque was recorded for $360 but it was actually written to a supplier for $630. Assume the bank correctly recorded this cheque for $630 when cleared. ______8. The company wrote a cheque for $100 (bank already processed) but forgot to record it in its books

1. B; 2. C; 3. B; 4. C; 5. A; 6. D; 7. B 8. B

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-28 Reconciliation of the Cash Accounts and the Bank Statements

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

182. Tiny footprints Corporation's bank statement included two types of electronic funds transfers (EFT). One type of EFT totaled $10,000 and was from customers paying their accounts online. Another type of EFT totaled $16,500 and was from Tiny footprints paying its accounts payable online. Required: (a) How will each of these items be handled with in Tiny footprints' bank reconciliation process? (b) Prepare the required journal entries, if any, that Tiny footprints will make to record the above information on its books. (a) Tiny footprints Corporation must add the electronic collections from customers in payment of their accounts receivable to its cash balance per books on the bank reconciliation. It must deduct the electronic payments it made in payment of its accounts payable from its cash balance per books on the bank reconciliation. (b) Cash Accounts Receivable Accounts Payable Cash

10,000 10,000 16,500 16,500

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

183. Finn Company has just received its June 30 bank statement from City Bank. The bank statement and the cash account, summarized below, are to be reconciled for the month of June.

Bank Statement Balance, June 1 $5,200 Deposits 9,200 Notes receivable collected for X company Principal 4,000 Interest 240 Cheques cashed (7,475) Bank service charge (20) NSF Cheque, Jimmy Dean (100) Balance, June 30 $11,045

Cash Account: Balance, June 1 $5,500 Cash Receipts 9,000 Cheques Written (7,000) Balance, June 30 $6,800

Other Data May June Deposit in transit at month end $600 $400 Outstanding cheques at month end 300 525

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Required: a. Prepare a bank reconciliation using the following format: Finn Company Bank Reconciliation June 30

Book Balance of Cash $ Bank Statement Balance $ Additions Additions Deductions

Deductions

Correct Cash Balance

b. Give the journal entries that should be made in the accounts of Finn Company as a result of the above bank reconciliation. A. Finn Company Bank Reconciliation June 30

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Book Balance of Cash Additions Note Collected Interest on Note Deductions Bank Service Charge NSF cheques, Jimmy Dean Correct Cash Balance

$6,800 Bank Statement Balance Additions 4,000 Deposit in transit 240 Deductions (20) Outstanding Cheques (100)

$11,045

$10,920 Correct Cash Balance

$10,920

B. 1. Cash $4,240 Note receivable 4,000 Interest revenue 240 2. Service charges expense 20 Cash 20 3. Trade receivables, Jimmy 100 Dean Cash 100

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400 (525)

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

184. Red Company received the following October 31, 20X3, bank statement:

Balance, September 30 Deposits recorded during October Customer note collected for Red Company (including $120 interest) Cheques cleared during October NSF cheque (given to Red by a customer) Bank service charges Balance, October 31

Transactions Balance $18,000 $40,000 58,000 2,520 60,520

The cash account reflected the following for October:

September 30 balance October cash deposits October cheques written October 31 balance

CASH ACCOUNT $20,500 38,000 $38,600 $19,900

The September 30 bank reconciliation showed: Deposits in transit, $3,000, and outstanding cheques, $500. Required: A. What was the amount of the deposits in transit at October 31? B. What was the amount of outstanding cheques at October 31? C. Prepare a bank reconciliation for October. Use the following format:

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38,300 100 15

22,220 22,120 22,105 22,105

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Book Balance of Cash $ Bank Statement Balance $ Additions Additions Deductions Correct Cash Balance

Deductions $ Correct Cash Balance

D. Give the journal entries that should be made by Red Company based on the bank reconciliation. a. [$38,000 - (40,000 - 3,000)] = $1,000 b. [$36,600 - (38,300 - 500)] = $800 c. Book Balance of Cash Additions Note Collected Interest on Note Deductions NSF Cheque Bank Service Charge Correct Cash Balance

$19,900 Bank Statement Balance Additions 2,400 Deposit in transit 120 Deductions (100) Outstanding Cheques (15)

$22,105

$22,305 Correct Cash Balance

$22,305

d. Entries

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1,000 (800)

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

1. Cash Note receivable Interest revenue 2. Trade receivables Cash 3. Service charge expense Cash

$2,520 2,400 120 100 100 15 15

185. What are "cash equivalents"? Specifically, where would they appear on the financial statements? Cash equivalents are short-term investments that can readily be converted into cash and whose value is unlikely to change. They normally have maturities of three months or less. They usually appear with cash on the statement of financial position as the first listed current asset.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-25 Cash and Cash Equivalents Defined

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

186. You are the new manager of Trustworthy Company. The company distributes goods throughout the Rocky Mountain area. Customers are billed after the shipments are sent. Most customers pay within two weeks. You notice that one employee is responsible for opening all incoming payments, recording them in the accounting records, and depositing all receipts in the bank daily. When asked why this one person performed all of these duties, you were told that it was more efficient for one person to handle cash and to keep track of things. If any cash was missing, responsibility could be easily determined. Do you agree with this arrangement? If you were to make changes, what would you do, and why? Note: Answers may vary. This is definitely not a good system. One person should not be responsible for the receipt of cash, accounting for cash, and depositing in the bank. The duties of handling cash and accounting for cash should be separated. This person could be stealing from the firm; since he/she is the only one handling the receipt of cash, the theft could easily be concealed (the only person that could do this is the owner, arguably.) For example, when a customer pays cash on account, the employee could debit sales returns and allowances instead of the cash account. To prevent such an occurrence, different employees should have the responsibility of receiving cash, accounting for cash, and depositing cash in the bank on a daily basis.

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 06-06 Report, control, and safeguard cash. Topic: 06-27 Internal Control of Cash

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

187. Piccolo Construction signed a contract to build a warehouse for a customer. Construction covers a four-year period. The following data pertain to the contract and subsequent construction: Contract price: $1,750,000 Estimated costs: 1,500,000 Actual results

Year Costs Collections 1 $750,000 $205,000 2 $450,000 $537,000 3 $225,000 $600,000 4 $ 75,000 $408,000

Required: Calculate the revenue, expense, and profit for each of the four years assuming the following independent situations: Situation 1: The estimated costs to complete are well established and no unknown issues exist with respect to the project. However, the customer has just been released from bankruptcy and this is the first contract with Piccolo Construction has obtained from them. Situation 2: Piccolo has previously built two warehouses for this customer and has never had any problems with cost overruns or cash collections. Situation 3: No problems with cash collections are anticipated however the project costs are uncertain due to environmental issues which may arise. Situation 1. Completed Contract method should be used.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Revenue Expenses Profit

Year Year Year Year 4 1 2 3 $0 $0 $0 $1,750,000 0 0 0 1,500,000 $0 $0 $0 $250,000

Situation 2 Percentage of completion method should be used

% of costs incurred Revenue Expenses Profit

50%

30%

15%

$875,000 $525,000 $262,500 $87,500 750,000 450,000 225,000 75,000 $125,000 $ 75,000 $37.500 $12.500

Situation 3 Zero-profit method should be used

Revenue Expenses Profit

$750,000 $450,000 $225,000 $325,000 750,000 450,000 225,000 75,000 $0 $0 $0 $250,000

Accessibility: Keyboard Navigation Blooms: Analyze Blooms: Apply Difficulty: Hard Learning Objective: 06-01 Apply the core revenue recognition principle to determine the accepted time to record sales revenue for typical manufacturers, wholesalers, retailers, and service companies. Topic: 06-02 Revenue Recognition for Bundled Goods and Services: A Five-Step Process

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Chapter 07 Reporting and Interpreting Cost of Sales and Inventory

True / False Questions 1. When ending inventory is smaller than beginning inventory, gross margin is less than, if ending inventory were larger than beginning inventory (assuming purchases remain constant). TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-02 Items Included in Inventory

2. The cost of goods purchased for resale should include all amounts that are the responsibility of the purchaser for freight and handling charges in order to get the goods to the purchaser's intended location. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-03 Costs Included in Inventory Purchases

3. In conformity with the matching process, the total cost of sales during the period must be related to the sales revenue earned during the period. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-04 Flow of Inventory Costs

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

4. Ownership of goods passes from the seller to the buyer after the buyer has paid for the goods. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-04 Flow of Inventory Costs

5. If transportation costs are the responsibility of the buyer, they should be added to the cost of purchases for the period. TRUE

6. An error in the measurement of ending inventory affects the cost of sales on the current period's statement of earnings and ending inventory on the statement of financial position. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 07-02 Record inventory and cost of sales by using three inventory costing methods. Topic: 07-19 Financial Statements Effects of Inventory Costing Methods

7. Inventory is a tangible asset purchased for use in the company's operations. FALSE

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

8. A manufacturing company uses three different inventory accounts to track their product costs. TRUE

9. An error in the ending inventory of the current period will have a similar but inverse effect on profit of the next accounting period. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 07-05 Describe methods for controlling inventory, and analyze the effects of inventory reporting errors on financial statements. Topic: 07-25 Errors in Measuring Ending Inventory

10. An error that overstates the ending inventory will cause profit for the period to be understated. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 07-05 Describe methods for controlling inventory, and analyze the effects of inventory reporting errors on financial statements. Topic: 07-25 Errors in Measuring Ending Inventory

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

11. An error that understates the ending inventory will cause assets to be understated. TRUE

12. An error that understates the ending inventory will cause the cost of goods sold for the period to be understated. FALSE

13. An overstatement of the ending inventory causes an overstatement of current assets and profit, as well as an overstatement of cost of goods sold for the same year. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 07-05 Describe methods for controlling inventory, and analyze the effects of inventory reporting errors on financial statements. Topic: 07-25 Errors in Measuring Ending Inventory

14. The specific identification method of costing inventories is suitable for goods that are interchangeable. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 07-02 Record inventory and cost of sales by using three inventory costing methods. Topic: 07-15 Specific Identification Method

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

15. In periods of falling prices, FIFO will result in a higher ending inventory valuation than the average cost formula. FALSE

16. The FIFO inventory cost formula agrees closely to the actual physical movement of goods in most businesses. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 07-03 Select the inventory costing method that reports the most faithful representation and relevant information to users of financial statements. Topic: 07-17 First-In, First-Out Method

17. The method of inventory cost determination that best matches cost and revenues is FIFO. FALSE

18. A change in the method of cost determination for inventory is infrequent but must be disclosed in the financial statements. TRUE

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

19. Approximating the physical flow of inventory is not important when selecting an inventory cost formula. FALSE

20. In periods of falling prices, FIFO will result in the same ending inventory valuation as the average cost formula. FALSE

21. The qualitative characteristic, reliability, is the primary consideration to a business considering changing its inventory costing method. FALSE

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

22. The selection of a method of inventory costing is important because it will affect reported profit, income tax expense (and, hence, cash flow), and the inventory valuation reported on the statement of financial position. TRUE

23. A large retail department store probably would use the specific identification inventory costing method for most of the items in its inventory. FALSE

24. In periods of falling prices, FIFO will result in a higher cost of goods sold than the average cost formula. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 07-02 Record inventory and cost of sales by using three inventory costing methods. Topic: 07-17 First-In, First-Out Method Topic: 07-18 Weighted-Average Cost Method

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

25. If prices never changed, there would be no need for alternative inventory cost formulas. FALSE

26. Inventory turnover measures the liquidity (nearness to cash) of inventory. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 07-06 Evaluate inventory management by using the inventory turnover ratio, and analyze the effects of inventory on cash flows. Topic: 07-27 Measuring Efficiency in Inventory Management

27. Inventory turnover is computed as cost of goods sold divided by ending inventory. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 07-06 Evaluate inventory management by using the inventory turnover ratio, and analyze the effects of inventory on cash flows. Topic: 07-27 Measuring Efficiency in Inventory Management

28. One of the benefits of having little inventory on hand is there is low spoilage risk. TRUE

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

29. The inventory turnover ratio measures the efficiency of inventory management. TRUE

30. Analysts and creditors watch the inventory turnover ratio because a sudden decline in this ratio may mean that a company is facing an unexpected decline in demand for its products or is becoming sloppy in its production management. TRUE

31. A low inventory turnover ratio indicates that minimal funds are tied up in inventory. FALSE

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

32. The higher the inventory turnover ratio, the higher the average days it takes to sell inventory. FALSE

33. A low inventory turnover ratio could mean a company is at risk of experiencing inventory shortages. FALSE

34. A company that has decreased its inventory between years will cause a decrease in cash flow from operations. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 07-06 Evaluate inventory management by using the inventory turnover ratio, and analyze the effects of inventory on cash flows. Topic: 07-26 Evaluating Inventory Management

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

35. The lower of cost and net realizable value should be applied to the total inventory, rather than to individual inventory items. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 07-04 Report inventory at the lower of cost and net realizable value (LC&NRV). Topic: 07-22 Valuation at Lower of Cost and Net Realizable Value

36. When the current value of inventory is lower than its cost, the inventory is written down to its net realizable value. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 07-04 Report inventory at the lower of cost and net realizable value (LC&NRV). Topic: 07-22 Valuation at Lower of Cost and Net Realizable Value

37. When the market value of inventory falls below cost and then recovers and rises above cost, inventory should be reported at cost. TRUE

38. If net realizable value of the inventory is lower than its cost, the total assets on the statement of financial position and net earnings on the statement of earnings will be reduced. TRUE

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

39. Inventory that originally cost $100 had been written down to its net realizable value (NRV) of $75. Subsequently, the NRV of the inventory recovered to equal its cost of $100. In this situation, the amount of the $25 ($100 - $75) prior write-down in value should be reversed. TRUE

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-04 Report inventory at the lower of cost and net realizable value (LC&NRV). Topic: 07-22 Valuation at Lower of Cost and Net Realizable Value

40. An inventory write-down from cost to net realizable value should not be made in the period in which the price decline occurs. FALSE

41. In the average cost formula used in a periodic inventory system, the same weighted average cost per unit is used to calculate all of the goods sold during the period. TRUE

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

42. When the average cost formula is applied in a periodic inventory system, the sale of goods during the year will change the unit cost used for calculating ending inventory. FALSE

43. When the average cost formula is applied in a periodic inventory system, a moving average cost per unit is calculated after each purchase. FALSE

44. The results under FIFO in a perpetual inventory system are the same as in a periodic inventory system. TRUE

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

45. All three methods of inventory cost determination will produce the same cumulative cost of goods sold over the life cycle of the business. TRUE

46. The presence of a purchases account in a trial balance usually indicates that the company is using a periodic inventory system. TRUE

47. When a periodic inventory system is used, a sales transaction requires two journal entries, while under the perpetual system, a sales transaction requires only one journal entry. FALSE

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

48. Under the periodic inventory system, the balance in the inventory account changes each time a purchase or sale is recorded. FALSE

49. Purchases, returns and allowances should be added to the cost of purchases on the income statement, assuming the periodic inventory system is used. FALSE

50. When a perpetual inventory system is used, the purchases returns and allowances account will not be part of the general ledger accounts. TRUE

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

51. Purchases discounts should be recorded as an addition to the cost of purchases in the calculation of cost of goods sold. FALSE

Multiple Choice Questions 52. Retail Company reported the following amounts on its 20X2 income statement: Purchases, $45,000; Beginning 20X2 inventory, $15,000; and Cost of goods sold, $50,000. What was the 20X2 ending inventory? A. $10,000 B. $25,000 C. $26,000 D. $27,000 Calculation: $15,000 + 45,000 - 50,000 = $10,000.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

53. The 20X2 records of Tom Company showed beginning inventory, $6,000; cost of goods sold, $14,000; and ending inventory, $8,000. What was the purchases amount for 20X2? A. $9,000 B. $10,000 C. $12,000 D. $16,000 Calculation: $6,000 + 16,000 - 14,000 = $8,000.

54. When goods are sold on credit, revenue usually should be recognized on which of the following dates? A. receipt of the sales order B. receipt of the goods by the buyer. C. passage of title from the seller to the buyer. D. manufacture of the goods.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

55. Which of the following types of inventory usually is not held by a manufacturing business? A. Finished goods inventory. B. Raw material inventory. C. Work in process inventory. D. Merchandise inventory.

56. The cost of goods sold account is which of the following? A. An asset B. A contra-asset C. An extraordinary item D. An expense

57. Which of the following is not an inventory account in a manufacturing company? A. Raw materials B. Work in process C. Goods available for sale D. Finished goods

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-01 Nature of Inventory and Cost of Sales

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

58. Wilburn Company reported the following data at year-end: Sales, $100,000; Beginning inventory, $8,000; Ending inventory, $6,000; Cost of goods sold, $60,000; and Gross margin, $40,000. What was the amount of merchandise purchases for the year? A. $40,000 B. $46,000 C. $58,000 D. $68,000 Calculation: $8,000 + 58,000 - 6,000 = $60,000.

59. The following information was taken from the 20X2 income statement of Milburn Company: Pretax profit, $12,000; Total operating expenses, $20,000; Sales revenue, $120,000. Compute the cost of goods sold. A. $88,000 B. $100,000 C. $108,000 D. $112,000 Calculation: $120,000 - 88,000 - 20,000 = $12,000.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

60. The following information was taken from the 20X2 income statement of Milburn Company: Pretax profit, $12,000; Total operating expenses (not including income taxes), $20,000; Sales revenue, $120,000; Beginning inventory, $8,000; and Purchases, $90,000. Compute the amount of the ending inventory. A. $8,000 B. $10,000 C. $18,000 D. $88,000 Calculation: $120,000 - (8,000 + 90,000 - 10,000) - 20,000 = $12,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-03 Costs Included in Inventory Purchases Topic: 07-05 Cost of Sales Equation

61. Which of the following statements about inventory costs is true? A. Factory overhead consists of manufacturing costs other than direct materials and direct labour. B. Net realizable value is the expected sales price plus selling costs. C. FIFO Reserve is a contra sales account for the excess of FIFO over weighted-average inventory. D. Purchases discounts increase sales revenue to arrive at net sales.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

62. Which of the following costs would be included in the costs of inventory of a manufacturer? A. Sales salaries and commissions. B. Utilities for the office building. C. Wages for factory workers. D. Wages for administrative staff.

63. Which of the following should be included in the cost of inventory? A. The cost of keeping the inventory records B. Amortization on the inventory warehouse C. Warehouse overhead D. Receiving and inspection costs

64. Which of the following should be included in the cost of the inventory? A. The cost of shelves used to store inventory B. Shipping and handling on inventory purchases C. Salaries paid to warehouse employees. D. Advertising costs to sell the inventory

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

65. Richmond Company had the following information taken from its 20X1 adjusted trial balance: Sales, $200,000; Sales Discounts, $4,000; Beginning Inventory, $10,000; and Purchases, $140,000. A physical count of the merchandise on hand at the end of the year showed $20,000. Compute the gross margin (gross profit) that would appear in the statement of earnings. A. $62,000 B. $66,000 C. $70,000 D. $74,000 Calculation: $200,000 - 4,000 - (10,000 + 140,000 - 20,000) = $66,000.

66. On March 10, Frazier Company received merchandise for resale from its normal supplier. The invoice price was $3,600 with terms of 2/10, n/30 for 100 units of Part #345. The invoice was paid on March 17. Freight costs were $120 and the company paid $108 of interest on a loan to buy the inventory. What is the unit cost that should be recorded for each of the 100 units of Part #345? A. $36.00 B. $36.48 C. $37.20 D. $37.56 Calculation: [($3,600 ´ 98%) + 120] ÷ 100 = $36.48.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

67. Which of the following equations is correct? A. Beginning Inventory + Purchases - Cost of Goods Sold = Ending Inventory. B. Sales + Cost of Goods Sold = Gross Margin. C. Beginning Inventory + Ending Inventory - Purchases = Cost of Goods Sold. D. Income Before Taxes - Operating Expenses = Cost of Goods Sold.

68. Marsden Company purchased a significant amount of raw materials inventory for a new product it is manufacturing. Marsden purchased insurance on these raw materials while they were in transit from the supplier. How should Marsden account for the insurance costs? A. As an operating expense of the period B. As a prepaid expense until the inventory arrives C. As part of the cost of the raw materials inventory D. As a contra-asset account to inventory

69. Which of the following costs would not be part of product inventory costs for a manufacturer such as Harley Davidson? A. Costs to store finished motorcycles until they are sold. B. Kickstands purchased for use in manufacturing the motorcycles. C. The factory manager's salary and benefits. D. The wages and benefits of an employee in the welding department.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

70. Which of the following businesses would not have cost of goods sold? A. A jewelry store B. A grocery store C. A movie theatre D. A manufacturer of batteries

71. The inventory of a retail company is comparable to which type of inventory of a manufacturing company? A. Work in process B. Finished goods C. Raw materials D. Supplies

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

72. Sheehan's Medical Instruments has net sales and gross profit of $1,841,000 and $971,000 respectively. Assuming the cost of goods available for sale were $1,584,000, what was the cost of Sheehan's ending inventory? A. $747,000 B. $460,000 C. $350,000 D. $714,000 COGS = $1,841,000 - $971,000 = $870,000.

73. Smithers Amusement Machines has cost of goods sold of $100,000 and ending inventory of $150,000. If Smithers had no purchases and no returns during the period, what was the cost of its beginning inventory? A. $50,000 B. $250,000 C. $150,000 D. $100,000

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

74. If Twiggz's statement of earnings showed cost of goods sold at $78,000, purchases of $80,000, freight-in at $300, purchase returns of $500 and end-of-the period inventory at $11,900, its beginning-of-the-period-inventory must have been: A. $10,400 B. $10,100 C. $9,900 D. $9,200 78,000 - (80,000 - 500) - 300 + 11,900 = $10,100.

75. A company reports its 20X2 cost of goods sold at $20.0 billion. Its ending inventory for 20X2 is $1.8 billion and for 20X1, ending inventory was $1.5 billion. How much inventory did the company purchase during 20X2? A. $18.5 billion B. $19.7 billion C. $20.3 billion D. $21.8 billion $1.5 + 20.3 - 1.8 = $20.3.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

76. Which of the following is true under the perpetual inventory system? A. One entry is required to record a sales return. B. Cost of goods sold cannot be determined unless a physical inventory is taken. C. Two entries are required to record a sale. D. A separate account for purchases is required.

77. Which inventory system keeps an ongoing record of purchases and sales of inventory with adjustments that reflect changes as they occur A. Periodic system B. Specific identification system C. Perpetual system D. Just-in-time system

78. On February 20, 20X1, Ross Sound Company purchased $10,000 of stereo equipment for resale on credit, subject to the terms 3/15, n/30. The periodic inventory system is used. If the company paid for these goods on March 20, the entry made to record the payment should include which of the following? A. A $300 debit to Purchases discounts. B. A $10,000 debit to Trade payables. C. An $8,500 credit to Cash. D. A $9,700 debit to Purchases.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

79. Which of the following statements regarding inventory systems is correct? A. In a perpetual inventory system, the inventory account is not changed for each purchase during the accounting period. B. In a perpetual inventory system, cost of goods sold is recorded at the time of each sale during the accounting period. C. In a periodic inventory system, cost of goods sold is developed from a comparison of beginning inventory and ending inventory only. D. In a periodic inventory system, the inventory account is increased for each purchase during the accounting period.

80. If merchandise for resale is purchased for $2,000, terms 2/10, n/30, the entry to record the purchase should be which of the following (assuming a periodic inventory system)?

Debit A B C D

Inventory Accounts payable Inventory Purchases

Credit $2,000 Trade payables 1,960 Inventory

1,960 1,960

1,960 Trade payables 2,000 Trade payables

2,000 2,000

A. Choice A B. Choice B C. Choice C D. Choice D

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-06 Perpetual and Periodic Inventory Systems

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

81. Which one of the following statements concerning the periodic and perpetual inventory systems is true? A. The periodic system uses a purchases account. B. Inventory controls are only needed for the periodic inventory systems. C. None of the accounting entries vary between the two systems. D. Due to advances in computers and their cost savings, many businesses recently have begun to use the periodic inventory system.

82. When a company uses the periodic inventory system in accounting for its merchandise inventory, which of the following is true? A. Purchases are recorded in the cost of goods sold account. B. The inventory account is updated after each sale. C. Cost of goods sold is computed at the end of the accounting periods rather than at each sale. D. The inventory account is updated throughout the year as purchases are made.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

83. Joe Company sold merchandise at an invoice price of $1,000 to Gibbs, Inc., with terms of 2/10, n/30. Which of the following is the correct entry to record the purchase by Gibbs if the company uses the periodic inventory system and the gross method to record purchases?

A B C D

Purchases Cash Inventory Trade Payables Purchases Trade Payables Purchases Trade Payables

1,000 1,000 1,000 1,000 980 980 1,000 1,000

A. Choice A B. Choice B C. Choice C D. Choice D

84. One way to determine the cost of goods sold in a periodic inventory system is to: A. subtract ending inventory from beginning inventory. B. subtract ending inventory from cost of goods available for sale. C. subtract purchases from ending inventory. D. add purchases to beginning inventory.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

85. A company that makes the following journal entry at the time of purchasing inventory is using which of the following inventory systems?

Dr. Inventory Cr. Accounts Payable

xxx xxx

A. Periodic system B. Just in time system C. Specific identification method D. Perpetual system

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

86. Kena's Formalwear uses a perpetual inventory system. Which of the following entries is the correct journal entry to record the purchase of $20,000 of merchandise on account?

A. Dr. Inventory Cr. Accounts payable

20,000

B. Dr. Inventory

20,000

Cr. Purchases

20,000

C. Dr. Purchases Cr. Inventory

20,000

D. Dr. Purchases Cr. Accounts payable

20,000

A. Choice A B. Choice B C. Choice C D. Choice D

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

87. Which of the following items will directly increase the cost of inventory for the buyer of goods? A. Purchase returns and allowances granted by the seller B. Freight charges paid by the seller C. Purchase discounts taken by the purchase D. Freight charges paid by the purchaser

88. IFRS standards require that a firm select the cost flow assumption that: A. maximizes income. B. provides the most conservative inventory cost. C. most clearly reflects current income. D. most closely matches the physical flow of inventory.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 07-02 Record inventory and cost of sales by using three inventory costing methods. Topic: 07-16 Cost Flow Assumptions

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

89. In 20X2, Landings, Inc. provided the following items in their footnotes. Their cost of goods available for sale was $4.5 billion under FIFO costing and their ending inventory value under FIFO costing was $2.1 billion. Their purchases were $4.1 billion. What was their opening inventory? A. $0.4 billion B. $2.0 billion C. $2.4 billion D. $6.2 billion $4.5 - 4.1 = $0.4.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 07-02 Record inventory and cost of sales by using three inventory costing methods. Topic: 07-17 First-In, First-Out Method

90. In 20X2, Landings Inc. provided the following items in their footnotes. Its cost of goods available for sale was $6.2 billion under FIFO costing and its ending inventory value under FIFO costing was $2.1 billion. Its opening inventory was $2.5 billion. What was its purchases? A. $3.7 billion B. $4.1 billion C. $4.6 billion D. $8.3 billion $6.2 - 2.5 = $3.7.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

91. Which of the following statements regarding inventories is correct? A. FIFO assumes that the costs of the earliest goods acquired are the last to be sold. B. It is generally good business management to sell the most recently acquired goods first. C. Under FIFO, the ending inventory is based on the latest units purchased. D. FIFO seldom coincides with the actual physical flow of inventory.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 07-02 Record inventory and cost of sales by using three inventory costing methods. Topic: 07-17 First-In, First-Out Method

92. Which of the following businesses is most likely to use the specific identification method? A. Shoe store B. Toy store C. Grocery store D. Antique bookstore

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 07-02 Record inventory and cost of sales by using three inventory costing methods. Topic: 07-14 Inventory Costing Methods Topic: 07-15 Specific Identification Method

93. Which cost determination method smooths the effects of price changes? A. Specific identification. B. FIFO. C. Average cost. D. Lower of cost and net realizable value.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

94. During a period of inflation, which cost formula will result in the highest net income? A. Average cost. B. FIFO. C. Lower of cost and net realizable value. D. Both FIFO and average cost.

Shillings had the following inventory activity during April:

Units

Beginning inventory Purchase: April 4 Sale: April 8 Purchase: April 12 Sales: April 24

Unit Total cost cost 800 $10.00 $8,000 1,400 11.00 15,400 (1,500) 900 10.50 9,450 (900)

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

95. If Shillings is using a perpetual system and the FIFO costing assumption, what is the ending inventory closest to? A. $7,350 B. $7,500 C. $7,310 D. $7,880 Units

Unit cost 800 $10.00

Total # cost units $8,000

FIFO INV

FIFO COGS

Beginning inventory Purchase: 1,400 $11.00 $15,400 April 4 2,200 $23,400 2,200 Sale: - 7,700 15,700 April 8 1,500 1,500 Purchase: 900 $10.50 9,450 900 April 12 Sales: -900 - 900 9,800 April 24 700 $7,350 $25,500

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

96. If Shillings is using a perpetual system and the weighted average costing assumption, what is the ending inventory closest to? A. $7,460 B. $7,588 C. $8,470 D. $7,392

Units

Unit cost 800 $10.00

Total # cost units $8,000

Average cost/unit Inventory

Beginning inventory Purchase: 1,400 $11.00 $15,400 April 4 2,200 $23,400 2,200 Sale: 1,500 April 8 1,500 Purchase: 900 $10.50 9,450 900 April 12 Sales: -900 - 900 April 24 700

$10.64 7,445

15,955

$10.56 9,503 $7,392 $25,458

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COGS

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

97. If Shillings is using a perpetual system and the FIFO costing assumption, what is the cost of goods sold closest to? A. $25,700 B. $25,500 C. $25,930 D. $22,400 Units

Unit cost 800 $10.00

Total # cost units $8,000

FIFO INV

FIFO COGS

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

98. If Shillings is using a perpetual system and the weighted average costing assumption, what is the cost of goods sold closest to? A. $24,683 B. $24,777 C. $25,012 D. $25,458

Units

Unit cost 800 $10.00

Total # cost units $8,000

Average cost/unit Inventory

Beginning inventory Purchase: 1,400 $11.00 $15,400 April 4 2,200 $23,400 2,200 Sale: 1,500 April 8 1,500 Purchase: 900 $10.50 9,450 900 April 12 Sales: -900 - 900 April 24 700

$10.64 7,445

15,955

$10.56 9,503 $7,392 $25,458

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COGS

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

99. A company purchased inventory as follows:

March 3 March 4

300 units at $9.00 200 units at $10.00

On March 5, it sold 400 units for $17 each. The weighted- average unit cost to be used for the cost of goods sold on March 5, in a perpetual inventory system, is A. $9.00. B. $9.40. C. $9.60. D. $10.00. $270 + $2,000 = $2,270/500 = $4.54 ´ 400 = $1,816.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-02 Record inventory and cost of sales by using three inventory costing methods. Topic: 07-18 Weighted-Average Cost Method

100. During a period of rising costs, the owners of a company wishing to minimize the company's tax burden would select which of the following cost flow assumptions? A. Specific identification. B. FIFO. C. Weighted-average cost. D. Lower of cost and net realizable value.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

101. During a period of rising costs, the manager of a company wishing to maximize her bonus (based on company profit)would select which of the following cost flow assumptions? A. Specific identification. B. FIFO. C. Weighted-average cost. D. Lower of cost and net realizable value.

102. Selection of an inventory cost formula by management should be influenced most by the: A. fiscal year end. B. physical flow of goods. C. goal of reporting inventory at the minimum of cost or net realizable value. D. income tax effects.

103. The consistent application of an inventory cost formula is essential for A. neutrality. B. accuracy. C. comparability. D. relevance.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 07-03 Select the inventory costing method that reports the most faithful representation and relevant information to users of financial statements. Topic: 07-21 Managers' Choice of Inventory Costing Methods

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

104. Nutone values its inventory on the lower of cost and market basis. The following data came from the 20X7 inventory, which consisted of two items:

Original cost Selling price Estimated selling costs Normal profit margin

Components Cables $12,000 $15,000 15,000 26,000 5,000 10,000 1,500 1,000

What would be the value of inventory on Nutone's statement of financial position? A. $29,000 B. $24,000 C. $25,000 D. $27,000 Components: NRV < Cost $15,000 - $5,000 = $10,000 plus Cables: Cost<NRV $15,000 Total $25,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-03 Select the inventory costing method that reports the most faithful representation and relevant information to users of financial statements. Topic: 07-21 Managers' Choice of Inventory Costing Methods

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

105. Why would high technology firms likely choose FIFO as their inventory valuation method? A. FIFO would cause reported earnings to be higher. B. FIFO would cause reported earnings to be lower due to the deflationary nature of its ending inventory causing taxes to also be lower. C. FIFO would ensure that inventory would not become obsolete. D. FIFO would cause earnings to be lower as ending inventory may have become obsolete.

106. Which of the following should be assessed when analyzing the quality of the cost of goods sold amount: A. The cost flow assumption for inventory B. The method used to count physical inventory C. The amount of discretionary expenses included in the cost of goods sold amount. D. The method used to depreciate inventory.

107. The lower of cost and net realizable value basis of valuing inventories is a departure from the: A. matching principle. B. valuation principle. C. historical cost principle. D. current market values.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

108. Inventory that originally cost $20,000 was written down to its net realizable value of $18,500 in the last accounting period. At the end of the current accounting period, the net realizable value is determined to be $23,000. At what amount should the inventory be reported on the current period's statement of financial position? A. $20,000. B. $18,500. C. $23,000. D. $16,000.

109. Under the lower of cost and net realizable value basis, the adjusting entry to record a decline in net realizable value below cost includes a: A. debit to the write off expense account. B. debit to the Cost of Goods Sold account. C. credit to the Cost of Goods Sold account. D. credit to the Sales account.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 07-04 Report inventory at the lower of cost and net realizable value (LC&NRV). Topic: 07-22 Valuation at Lower of Cost and Net Realizable Value

110. The lower of cost and net realizable value basis of valuing inventories ensures that inventories are: A. valued at their current cost. B. correctly valued. C. not under-valued. D. not over-valued.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

111. Pippa Inc. is a wholesaler of electronics. It purchased 1,000 units of widgets for $500 each during 2019. The selling price during the year was $750 per unit. At year end, it had 100 units on hand and due of changes in technology, the selling price will have to be reduced by 40% in order to sell them. The value of each unit of widgets for the year-end inventory presentation should be: A. $600. B. $500. C. $400. D. $450. Original selling price: $750. Reduction in Selling Price: 40% Current selling price: (40% ´ $750 = $300); $750 - $300 = $450.

112. Picton Co. prepares its estimate of LCM using the net realizable value. Inventory item X570 cost $45 and the item is currently selling in the market for $55 and selling costs are estimated to be $6. Picton expects to earn a profit of $4 on the sale of this item. In its year-end financial statements, Picton Co. should value this item at: A. $49 B. $55 C. $45 D. $50

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

113. Inventory that originally cost $10,000 was written down to its net realizable value of $8,500 at the end of 2012. At the end of 2018, the net realizable value is determined to be $10,500. At what amount should the inventory be reported on the December 31, 2018 statement of financial position? A. $10,500. B. $10,000. C. $9,500. D. $8,500.

114. The lower of cost and net realizable value basis of valuing inventories ensures that inventories are A. valued at their current cost. B. not under-valued. C. reflective of obsolescence. D. valued at their selling price.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

115. Shilling Company has implemented an inventory management system in which one person places the order for new inventory, a second person checks it against the purchase order when it arrives and a third person records the receipt of physical inventory in the accounting records. The purpose of this system is: A. to reduce storage costs. B. to guard against stock-outs. C. to reduce accounting errors. D. to guard against internal theft and collusion.

116. An understatement of the beginning inventory results in A. no effect on the period's earnings. B. an overstatement of earnings. C. an understatement of earnings. D. a need to adjust purchases.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

117. Will Company's independent accountant discovered that the ending inventory for 20X2 had been overstated by the company by $2,000. Before the correction, what was the effect in the 20X2 statement of earnings because of the overstatement of the ending inventory? A. Pretax profit understated by $2,000. B. Cost of goods sold was overstated by $2,000. C. Pretax profit was overstated and the cost of goods sold was understated by $2,000. D. Pretax profit was understated by $2,000.

118. A $15,000 overstatement of the 20X2 ending inventory was discovered after the financial statements for 20X2 were prepared. What was the effect of the inventory error on the 20X2 financial statements? A. Current assets were overstated and profit was understated. B. Current assets were understated and profit was understated. C. Current assets were understated and profit was overstated. D. Current assets were overstated and profit was overstated.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

119. Wilder Company reported pretax profit amounts of: 20X2, $11,000; and 20X3, $15,000. Later it was discovered that the ending inventory for 20X2 was understated by $2,000 (and not corrected in 20X3). The correct pretax profit for each year was which of the following?

A B C D

20X2 $9,000 $13,000 $13,000 $9,000

20X3 $13,000 $13,000 $17,000 $17,000

A. Choice A B. Choice B C. Choice C D. Choice D Calculation: $11,000 + 2,000 = $13,000; $15,000 - 2,000 = $13,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 07-05 Describe methods for controlling inventory, and analyze the effects of inventory reporting errors on financial statements. Topic: 07-25 Errors in Measuring Ending Inventory

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

120. At the end of 20X1, a $2,500 understatement was discovered in the amount of the 20X1 ending inventory as reflected in the perpetual inventory records. What were the 20X1 effects of the $2,500 inventory error (before correction)? A. Assets (inventory) were understated by $2,500 and pretax profit was understated by $2,500. B. Assets (inventory) were understated by $2,500 and pretax profit was overstated by $2,500. C. Cost of goods sold was understated by $2,500 and pretax profit was understated by $2,500. D. Cost of goods sold was overstated by $2,500 and pretax profit was overstated by $2,500.

121. An overstatement of ending inventory in one period results in A. no effect on profit of the next period. B. an overstatement of profit of the next period. C. an understatement of profit of the next period. D. an overstatement of the ending inventory of the next period.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

122. If beginning inventory is understated by $1,300 and ending inventory is understated by $700, pretax profit for the period will be which of the following? A. Understated by $600. B. Understated by $2,000. C. Overstated by $600. D. Overstated by $2,000. Calculation: $1,300 - 700 = $600.

123. On December 15, 20X1, Toby Company accepted delivery of merchandise which it purchased on credit. As of December 31, 20X1, the company had neither recorded the transaction nor included the merchandise in its inventory because the seller's invoice had not been received. The effect of this omission on its statement of financial position at December 31, 20X1, (end of the accounting period) was which of the following? A. Assets and shareholders' equity were overstated but liabilities were not affected. B. Shareholder's equity was the only item affected by the omission. C. Assets and liabilities were understated but shareholders' equity was not affected. D. Assets and shareholders' equity were understated but liabilities were not affected.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

124. An overstatement of the beginning inventory results in A. an overstatement of profit. B. an understatement of profit. C. no effect on the period's profit. D. a need to adjust purchases.

125. Sue Company reported profit in 20X1 of $27,000 and in 20X2 of $32,000. Later it was discovered that the ending inventory for 20X1 was understated by $15,000. Disregard income taxes. The restated correct amounts of profit for 20X1 and 20X2 were which of the following?

A B C D

20X1 $42,000 $42,000 $12,000 $42,000

20X2 $32,000 $17,000 $47,000 $32,000

A. Choice A B. Choice B C. Choice C D. Choice D Calculation: $27,000 + 15,000 = $42,000; $32,000 - 15,000 = $17,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-05 Describe methods for controlling inventory, and analyze the effects of inventory reporting errors on financial statements. Topic: 07-25 Errors in Measuring Ending Inventory

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

126. Upaway Company hired some students to help count inventory during their semester break. Unfortunately, the students added incorrectly and ending inventory was overstated by $12,000. What would be the effect of this error in ending inventory? A. Profit would be overstated. B. Profit would be understated. C. Ending retained earnings would be understated. D. Cost of goods sold would be overstated and ending retained earnings would be understated.

127. During the audit of Virginia Company's 20X2 financial statements, the auditors discovered that the 20X1 ending inventory had been overstated by $10,000 and that the 20X2 ending inventory had been overstated by $8,000. Before the effect of these errors, 20X2 pretax profit had been computed as $100,000. What should be reported as the correct 20X2 profit before taxes? A. $98,000 B. $100,000 C. $102,000 D. $118,000 Calculation: $100,000 + 10,000 - 8,000 = $102,000.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

128. Darkhorse Ltd.'s average days to sell inventory is 40 and its average inventory is $254,000. What is its cost of goods sold? (Use 365 days in a year. Do not round intermediate calculations.) A. Cannot be determined. B. $12,700,000. C. $2,317,750. D. $1,854,200. Calculation: Inventory Turnover Ratio = 365/average days to sell inventory = 365/40 = 9.125 times.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-06 Evaluate inventory management by using the inventory turnover ratio, and analyze the effects of inventory on cash flows. Topic: 07-26 Evaluating Inventory Management

129. An automobile dealer would most likely have a A. high inventory turnover. B. average inventory turnover. C. high volume. D. low inventory turnover.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

130. The inventory turnover ratio is calculated by dividing cost of goods sold by A. beginning inventory. B. ending inventory. C. average inventory. D. 365 days.

131. Days in inventory is calculated by dividing 365 days by A. average inventory. B. beginning inventory. C. ending inventory. D. the inventory turnover ratio.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

132. For 20X3, Wilver Inc. reported $24,000 beginning inventory and $26,000 ending inventory. Net sales were $160,000 and gross profit was $55,000 for the same period. Based on these figures, inventory turnover for 20X3 was: A. 3.4 times. B. 4.2 times. C. 6.4 times. D. 9.2 times. Calculation: Inventory Turnover Ratio = Cost of goods sold/Average Inventory.

133. An increase in inventory turnover means, days in inventory A. increases. B. decreases. C. remains the same. D. cannot be determined.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

134. A company recorded net purchases of $20.3 billion for 20X2. In 20X1, ending trade payables was $1.2 billion and in 20X2, it was $1.6 billion. How much cash was paid to suppliers in 20X2? A. $18.7 billion B. $19.9 billion C. $20.7 billion D. $21.9 billion Calculation: $20.3 - (1.6 - 1.2) = $19.9.

135. Last Horizons Ltd. has a days in inventory ratio of 45 and average inventory of $265,000. What is its cost of goods sold? A. $11,762,112 B. $1,655,210 C. $2,149,444 D. Cannot be determined Inventory turnover = 365/45 days = 8.11 ´ $265,000 = $2,149,444.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 07-06 Evaluate inventory management by using the inventory turnover ratio, and analyze the effects of inventory on cash flows. Topic: 07-27 Measuring Efficiency in Inventory Management

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

136. How is the cost of goods sold calculated under the periodic method? A. By adding the cost of purchases during the period to the cost of the inventory on hand at the beginning of the period and adding this figure to the cost of the inventory on hand at the end of the period. B. By adding the cost of purchases during the period to the cost of the inventory on hand at the end of the period and subtracting the inventory on hand at the beginning of the period. C. By subtracting the cost of the inventory on hand at the ending of the period from the cost of goods available for sale. D. By carefully matching selling and administrative expenses with the sales to which they are related and then reporting these expenses in the same period the associated revenue is reported.

137. In order to determine cost of goods sold in a periodic inventory system we A. add purchases to beginning inventory. B. subtract ending inventory from beginning inventory. C. subtract ending inventory from beginning inventory plus purchases. D. subtract purchases from ending inventory.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

138. On March 15, 20X1, Jack Company purchased $5,000 of merchandise on credit subject to terms 2/10, n/20. The periodic inventory system is used. If Jack pays for these goods on March 30, the entry made to record the payment should include which of the following? A. Credit of $100 to Purchase discounts. B. Debit of $4,900 to Trade payables. C. Debit of $5,000 to Trade payables. D. Credit of $4,900 to cash.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-29 Appendix 7A: Cost Flow Assumptions—Periodic Inventory System

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

139. Which of the following entries is the correct journal entry to record the purchase of $20,000 of merchandise on account under a periodic inventory system?

A. Dr. Inventory Cr. Accounts payable

20,000

B. Dr. Inventory

20,000

Cr. Purchases

20,000

C. Dr. Purchases Cr. Inventory

20,000

D. Dr. Purchases Cr. Accounts payable

20,000

A. Choice A B. Choice B C. Choice C D. Choice D

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

140. Seinerfeld Company had its merchandise inventory warehouse destroyed by a fire. Thankfully, the owner had the accounting records at home to prepare financial statements after counting the inventory earlier in the day. The company used the periodic inventory system. In the shock of being notified of the fire, the owner spilled his dinner on the statement of earnings he had just completed. However, the following information was readable: Sales, $200,000; Beginning Inventory, $20,000; Purchases, $130,000; Total Operating Expenses (not including taxes), $40,000; and Profit Before Taxes, $20,000. There were no sales returns, purchases returns, sales discounts nor purchases discounts. Compute the amount of the ending inventory on hand before the fire. A. $-0B. $10,000 C. $20,000 D. $30,000 Calculation: $200,000 - (20,000 + 130,000 - 10,000) - 40,000 = $20,000.

141. The lower of cost and net realizable value basis of valuing inventories ensures that inventories are A. valued at their current cost. B. not undervalued. C. monitored on an ongoing basis as to their value relative to their cost. D. valued at their selling price.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Short Answer Questions 142. For each of the following types of inventory, enter a letter to indicate the type of business in which the inventory is more likely to appear. Type of Business A. Retail B. Manufacturing C. Service Type of Inventory ____ 1. Raw materials. ____ 2. Merchandise. ____ 3. Finished goods. ____ 4. Work in progress. 1. B; 2. A; 3. B; 4. B

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-01 Nature of Inventory and Cost of Sales

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

143. Match the descriptions with inventory costing methods by entering the proper letter in the space to the left. A. Specific identification B. Weighted average C. FIFO D. None of the above is correct.

_____ 1. _____ 2. _____ 3. _____ 4. _____ 5. _____ 6. _____ 7. _____ 8.

Tends to match older costs with current revenue. Cost of goods sold and inventory are costed at the oldest costs. Inventory and cost of goods sold are valued at the same unit cost. Requires computation of an average cost for the entire period excluding beginning inventory. Requires computation of a new unit cost after each purchase and after each sale. Subject to manipulation by arbitrary choice of unit costs when sold or issued. Cost of goods sold is costed at the oldest unit costs. Inventory is costed at the newest unit costs.

1. C; 2. D; 3. B; 4. D; 5. B; 6. A; 7. C; 8. C.

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 07-02 Record inventory and cost of sales by using three inventory costing methods. Topic: 07-14 Inventory Costing Methods

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

144. Match the appropriate letter regarding inventory systems with each of the following statements. A. The perpetual inventory system. B. The periodic inventory system. C. Both the perpetual and periodic inventory systems. D. Neither the perpetual nor the periodic inventory systems. ____ 1. Uses a separate account for recording purchases. ____ 2. Requires that purchases be recorded at their cash equivalent cost. ____ 3. Requires that two concurrent journal entries be made to record a purchase. ____ 4. Cost of goods sold cannot be determined until a physical count is taken. ____ 5. Inventory account is increased for each purchase and decreased for each sale. ____ 6. Used to reveal any inventory shortages and shrinkage that occur during the period. 1. B; 2. C; 3. D; 4. B; 5. A; 6. A

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

145. Match the inventory system with the statement by entering the appropriate letters to the left: A. Perpetual inventory system. B. Periodic inventory system. C. Neither of the above is correct. D. Both A and B are correct.

_____ 1. _____ 2. _____ 3. _____ 4. _____ 5. _____ 6. _____ 7. _____ 8. _____ 9.

The inventory system that provides more control features. The inventory system that requires adjusting (or closing) entries for the beginning and ending inventories. A purchase requires two journal entries. A sale requires one journal entry. Merchandise inventory is debited when goods are purchased. A return of a purchase requires two journal entries. A physical inventory count is never taken. A sale requires two journal entries. Cost of goods sold is computed as a residual amount after an inventory count.

1. A; 2. B; 3. C; 4. B; 5. A; 6. C; 7. C; 8. A; 9. B

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

146. Taste Best Company uses the periodic inventory system. It has compiled the following information in order to prepare the financial statements at the end of 20X2:

Gross sales during 20X2 Sales returns and allowances during 20X2 Beginning inventory, January 1, 20X2 Ending inventory, December 31, 20X2 Purchases during 20X2

$1,400,000 20,000 70,000 60,000 730,000

Calculate the following amounts:

A. Goods available for sale B. Cost of goods sold C. Gross margin on sales

$ _____ $ _____ $ _____

A. $70,000 + $730,000 = $800,000 B. $800,000 - $60,000 = $740,000 C. $1,400,000 - $20,000 - $740,000 = $640,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-29 Appendix 7A: Cost Flow Assumptions—Periodic Inventory System

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

147. The records of Time 4 Tea Company show 20X2 purchases of $9,000. A physical count revealed a 20X2 ending inventory of $4,000. The 20X2 beginning inventory was $5,000. What was the cost of goods sold for 20X2? $5,000 + $9,000 - $4,000 = $10,000

148. The following statement of earnings is complete except for a few captions with solid lines on the left, and amounts with dotted lines on the right. You are to fill in the most likely captions and amounts: Smith Retail Company Statement of Earnings for the Year Ended December 31, 20X2

Gross Sales Revenue _____ Sales discounts _____ Cost of goods sold: _____ _____ _____ Ending Inventory _____ _____ Operating expenses _____

$_____ $3,000 _____

5,000 $101,000

$12,000 _____ 77,000 _____ _____ 38,000 _____ $16,000

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Smith Retail Company Income Statement For the Year Ended December 31, 20X2

Gross sales ($101,000 + $5,000) Less: Sales and returns allowances Sales discounts ($5,000 - $3,000) Net Sales Cost of goods sold: Beginning inventory, January 1, 20B Purchases ($77,000 - $12,000) Goods available for sale Less: Ending inventory, December 31, 20B ($77,000 - $63,000) Cost of goods sold ($101,000 - $38,000) Gross margin on sales Operating expenses ($38,000 - $16,000) Profit

$106,000 $3,000 $2,000

5,000 $101,000

$12,000 65,000 77,000 14,000 63,000 38,000 22,000 $16,000

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-05 Cost of Sales Equation

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

149. The Wilburn Company's income statement for 20X2 reported the following: Cost of goods sold, $75,000; beginning inventory, $12,000; and ending inventory, $15,000. The amount of purchases during 20X2 was what amount? $_____________________________ (Show computations). Purchases: $75,000 +$15,000 - $12,000 = $78,000

150. Supply the missing dollar amounts for the 20X2 statement of earnings of RDS Company by writing your answer in the table provided for you for each of the following independent cases. Show your computations below the table.

Sales revenue Sales returns & allowances Net sales revenue Beginning inventory Purchases Transportation-in Purchase returns Goods available for sale Ending inventory Cost of goods sold Gross margin Expenses Pre-tax profit

Case A $8,000 150 ? 11,000 5,000 ? 350 ? 10,000 ? ? 1,300 $800

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Case B $6,000 ? ? 6,500 ? 120 600 14,790 10,740 ? 1,450 ? $(500)

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Please review the following information:

Case A $8,000 150 7,850 11,000 5,000 100 350 15,750 10,000 5,750 2,100 1,300 $800

Case B $6,000 500 5,500 6,500 8,770 120 600 14,790 10,740 4,050 1,450 1,950 $(500)

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-01 Nature of Inventory and Cost of Sales Topic: 07-10 Recording Inventory Transactions in a Perpetual System

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

151. Compute the missing amounts for the Bella's statement of earnings for each independent scenario.

Sales revenue Beginning inventory Purchases Cost of goods available for sale Ending inventory Cost of goods sold Gross margin Expenses Profit

Scenario Scenario Scenario A B C $800 $800 ? 100 ? 90 500 420 ? ? ? ? 150 ? ? 300 ?

110 ? ? 400 (50)

160 340 ? 420 60

Please review the following information:

Sales revenue Beginning inventory Purchases Cost of goods available for sale Ending inventory Cost of goods sold Gross margin Expenses Profit

Scenario Scenario Scenario A B C $800 $800 $820 100 140 90 500 420 410 600 560 500 150 450 350 300 50

110 450 350 400 (50)

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160 340 480 420 60

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

152. Duchess Company prepared income statements that reflected pretax profit of $21,000 for 20X1 and $30,000 for 20X2. An external audit has determined that there were two errors in the inventory amounts as follows

Ending inventory, 20X1 Ending inventory, 20X2

Amount Correct Reported Amount $15,000 $14,000 18,000 19,000

The correct pretax profit amount for each year is (show computations assuming the errors were not corrected): 20X1: $__________________ 20X2: $__________________ 20X1: $21,000 - $1,000 = $20,000 20X2: $30,000 + $1,000 +$1,000 = $32,000

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

153. For each independent situation given below, determine the effect on pretax profit for each. Enter "+" to indicate pretax profit is overstated, "-" to indicate pretax profit is understated, or "NA" to indicate that pretax profit is not affected.

Independent Situations A. B. C. D. E. F.

Effect on Pre-tax Profit 20X1 20X2

20X1 ending inventory overstated 20X1 ending inventory understated 20X2 ending inventory overstated 20X2 beginning inventory overstated 20X1 beginning inventory understated 20X2 beginning inventory understated and 20X2 ending inventory understated by the same amount

Please review the following information:

Independent Situations A. B. C. D. E. F.

20X1 ending inventory overstated + 20X1 ending inventory understated 20X2 ending inventory overstated NA 20X2 beginning inventory overstated NA 20X1 beginning inventory understated + 20X2 beginning inventory understated and 20X2 ending inventory understated by the same amount

Effect on Pre-tax Profit 20X1 20X2 + + NA NA

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

154. House Depot Company hired a new store manager in March 20X3, who determined the ending inventory on December 31, 20X3, to be $20,000. In March, 20X5 the company discovered that the 20X3 ending inventory should have been $28,000. The December 31, 20X4, inventory was correct. Ignore income taxes. Complete the following table to show the effects of the inventory error on the four amounts listed. Give the amount of the discrepancy and indicate whether it was overstated (O), understated (U), or had no effect (N). Please review the following information:

Year

20X3 20X4

Ending Inventory

Cost Profit of Goods Sold 8,000 (U) 8,000 8,000 (O) (U) (N) 8,000 8,000 (U) (O)

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

155. Goofy Company reported profit for 20X1 of $30,000, and in 20X2 $40,000 (both after income taxes at a 20% rate). It was discovered in 20X3 that the ending inventory for 20X1 was overstated by 8,000 (before any income tax effect). The correct profit (after income tax of 20%) should be: 20X1 $_______________________ 20X2 $_______________________ 20X1-$30,000 - ($8,000 ´.80) = $23,600; 20X2-$40,000 + ($8,000 ´.80) = $46,400

156. Telly Company reported profit in 20X1 of $22,000 and in 20X2 of $32,000. Later it was discovered that the 20X1 ending inventory was overstated by $5,000. Compute the amount of profit (disregard income tax) for 20X1 and 20X2. 20X1 $____________________ 20X2 $__________________ 20X1-$22,000 - $5,000 = $17,000; 20X2-$32,000 + $5,000 = $37,000

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

157. While preparing the first quarter 20X7 financial statements, the accounting staff of Melanson Flooring Inc. discovered an error in the December 31, 20X6 financial statements. Inventory costing $225,000 had been in transit and was not received until January 5 20X7. The accounts payable had recorded the purchase as an account payable on December 28 20X6. The inventory had been shipped on December 27 20X6 with the terms FOB shipper. Melanson uses a periodic inventory system. A What impact did the error have on Melanson's 20X6 financial statements? B When the error is discovered in the first quarter of 20X7, what correcting entry should Melanson's accountants make? A. The shipment was recorded as a 20X6 purchase but was not included in the ending inventory. Therefore, the 20X6 ending inventory was understated and 20X6 cost of sale was overstated. B. Correcting entry in 20X5:

Inventory (opening) Retained earnings

225,000 225,000

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

158. Astro Corporation uses the periodic inventory system. Information related to Astro's inventory at October 31 is given below:

October 1

Beginning 400 = inventory units $4,000 @ $10.00 Purchase 800 = 8,320 units @ $10.40 Purchase 600 = 6,480 units @ $10.80 Purchase 200 = 2,320 units @ $11.60 2,000 $21,120 units

Requirements: 1. Show calculations to determine the ending inventory using the FIFO cost formula if 400 units remain on hand at October 31 2. Show calculations to determine the ending inventory using the average cost formula if 400 units remain on hand at October 31. 1. 400 units in ending inventory. Under FIFO, the units remaining in inventory are the ones purchased most recently.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Oct. 24

200 = units $2,320 @ $11.60 200 = units 2,160 @ 10.80 400 $4,480 units

2. 400 units in ending inventory. Under the average cost formula, the weighted-average cost per unit must be calculated. $21,120 2,000 units = $10.56 400 units $10.56 = $4,224

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

159. Miller Corporation uses the periodic inventory method and had the following inventory information available:

Jan 1. Jan 20 July 25 Nov. 20

Beginning inventory Purchase Purchase Purchase

Units Unit Cost Total Cost 100 $4 $400 500 $5 2,500 100 $6 600 300 $7 2,100 1,000 $5,600

A physical count of inventory on December 31 revealed that there were 350 units on hand. Requirements: Answer the following independent questions and show calculations supporting your answers. 1. Assume that the company uses FIFO. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses average cost. The value of the ending inventory on December 31 is $__________. 3. Determine the difference in the amount of profit that the company would have reported if it had used FIFO instead of average cost. Would profit have been greater or less? 1. FIFO: Ending inventory $2,400

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

300 units @ $7 50 units @ $6 350 units

= $2,100 = 300 $2,400

2. Average Cost: Ending inventory $1,960 $5,600/1,000 = $5.60 per unit ´ 350 units = $1,9603. FIFO: Cost of goods sold $3,200

Cost of goods available $5,600

Proof: 100 units @ $4 500 units @ $5 50 units @ $6 650 units

- Ending Inventory - $2,400

= $400 = 2,500 = 300 $3,200

Average: Cost of goods sold $3,640

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= Cost of goods sold = $3,200

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Cost of goods available $5,600

- Ending Inventory - $1,960

= Cost of goods sold = $3,640

Profit would have been $440 ($3,640 vs. $3,200) greater if the company used FIFO instead of average.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-17 First-In, First-Out Method Topic: 07-18 Weighted-Average Cost Method

160. Happy Feet Company uses the periodic inventory system and applied FIFO inventory costing. At the end of the annual accounting period, December 31, 2019, the accounting records for the best-selling item in inventory showed:

Transaction Units Unit Cost Beginning Inventory, Jan. 1, 2019 200 $11 1. Purchase, Feb. 1 400 12 2. Sale, March 15, (sold at $20 each) (300) 3. Purchase, May 15 350 14 Sale, July 31 (sold at $25 each) (500) Determine the following (show computations and round to the nearest dollar):

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Goods available for sale: $_____ Ending inventory: $_____ Cost of goods sold: $_____

Goods available for sale: 200 @ $11 + 400 @ $12 + 350 @ $14 = $11,900 Ending inventory: 150 units @ $14 = $2,100 Cost of goods sold: BI + P - EI = COGS $11,900 - $2,100 = $9,800

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

161. Walker Corporation uses the periodic inventory method and had the following inventory information available:

Jan. 1 20 July 25 Oct. 20

Beginning inventory Purchase Purchase Purchase

Units Unit Cost Total Cost 15 $4.00 $60 60 4.40 264 30 4.20 126 45 4.80 216 150 $666

A physical count of inventory on December 31 revealed that there were 50 units on hand. Requirements: Answer the following independent questions and show calculations supporting your answers. 1. Assume that the company uses FIFO. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses average cost. The value of the ending inventory on December 31 is $__________. 3. Assume that the company uses average cost. The value of cost of goods sold on December 31 is $__________. 4. Assume that the company uses FIFO. The value of the cost of goods sold on December 31 is $__________. 1. FIFO: Ending inventory $237

45 units @ $4.80 = $216 5 units @ $4.20 = 21 50 units $237

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

2. Average Cost: Ending inventory $222 $666 / 150 = $4.44 per unit ´ 50 units = $222 3. Average Cost: Cost of goods sold

Cost of goods available - Ending Inventory = Cost of goods sold $666 - $222 = $444

4. FIFO: Cost of goods sold $429

Cost of goods available - Ending Inventory = Cost of goods sold $666 - $237 = $429

Proof: 15 units @ $4.00 = $60 60 units @ $4.40 = 264 25 units @ $4.20 = 105 100 units $429

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-17 First-In, First-Out Method Topic: 07-18 Weighted-Average Cost Method

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

162. Celebration Inc. opened for business on July 1, 2019 selling unique jewelry purchased from local artisans. During the month the company made the following purchases:

Date

Inventory Tag Number

July 1 July 3 July 5

Cost 001 002 003 004 005 006 007 008 009 010

July 10 July 13 July 26 July 31

$1,500 600 1,200 2,300 400 1,115 3,900 900 1,700 2,225

On July 31, only inventory items 006, 008, and 010 remained in inventory. Requirements: (a) Determine the cost of goods sold for Celebration Inc. for the month of July using the specific identification cost determination method. (b) Discuss whether or not specific identification is an appropriate cost determination method for this company. (a) Inventory sold:

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Inventory Tag Number Cost 001 $1,500 002 600 003 1,200 004 2,300 005 400 007 3,900 009 1,700 Cost of goods sold: $11,600

(b) Specific identification is the preferred inventory method for this company because it provides the most accurate cost of goods sold and ending inventory values. It is appropriate for this company because of the heterogeneity of the company's inventory items. The small volume of inventory purchased and sold by the company makes this method practical in either a computerized or manual inventory system.

163. Yoakum Company reported the following information related to inventory and sales:

Units Beginning inventory Purchase No. 1 Purchase No. 2

Unit Cost 100 700 200

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$7 10 12

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Sold 700 units at $20 each. Calculate the revenue, cost of goods sold, gross margin and inventory balances assuming a) the weighted average inventory cost method b) FIFO cost method Please review the following information:

Method Revenue Cost of Goods Sold Gross Margin Inventory a. Weighted-Average $14,000 $7,070 $6,930 $3,030 b. FIFO $14,000 $6,700 $7,300 $3,400

164. Morrison Corporation, which uses a perpetual inventory system, recorded the following inventory transactions during the last two months of 2013.

Purchases Sales Units Unit Cost Units Selling price/unit Nov. 1 Beginning inventory 112 $72 13 Purchase 76 $71 29 Sale 121 $99 Dec 3. Purchase 56 $69 16 Sale 67 $98

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Requirements: (a) Using the FIFO cost formula, calculate the amount of cost of goods sold for the two months of November and December. (Show calculations) (b) Using the average cost formula, calculate the amount of ending inventory at December 31. (Show calculations) A. Purchases Nov. 1 Nov. 13 Nov. 29 Dec. 3

Cost of Goods Sold

(76 @ $71) = $5,396 (112 @ $72) = $8,064 (9 @ $71) = $639 = $8,703 (56 @ $69) = $3,864

Dec. 16

(67 @ $71) = $4,757

Balance (112 @ $72) = $8,064 (112 @ $72) = $8,064 (76 @ $71) = $5,396 = $13,460 (67 @ $71) = $4,757 (67 @ $71) = $4,757 (56 @ $69) = $3,864 = $8,621 (56 @ $69) = $3,864

b. Purchases

Cost of Goods Sold

Balance Nov. 1 (112 @ $72) = $8,064 Nov. 13 (76 @ $71) = $5,396 (188 @ $71.60) = $13,460.00 Nov. 29 (121 @ $71.60) = $8,663.60 (67 @ 71.60) = $4,796.40 Dec. 3 (56 @ $69) = $3,864 (123 @ 70.41) = $8,660.40 Dec. 16 (67 @70.41) = $4,717.47 (56 @ 70.41) = $3,942.93

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Please note that rounding discrepancies may result in the above schedule depending on how the unit costs are rounded.

165. Jaywall Corporation, which uses a perpetual inventory system, recorded the following inventory transactions during 20X3.

Price/Unit April 1 25 May 4 16 June 4

Beginning inventory Purchase Purchase Sale Purchase

Purchases Units Unit Cost 45 $8 150 65

Sales Units

9 10 120

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Selling

$16

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

(a) Using the FIFO cost formula, calculate the amount of the cost of goods sold for the quarter ended June 30. (Show calculations) (b) Using the average cost formula, calculate the amount of ending inventory at June 30. (Show calculations) a. Purchases April 1 April 25 May 4 May 16

Cost of Goods Sold

(150 @ $9) = $1,350 (65 @ $10) = $650

Balance (45 @ $8) = $360 (45 @ $8) = $360 (150 @ $9) = $1,350 = $1,710 (45 @ $8) = $360 (150 @ $9) = $1,350 (65 @ $10) = $650 = $2,360

(45 @ $8) = $360 (75 @ $9) = $675 = $1,035

b. Purchases Cost of Goods Sold April 1 April 25 (150 @ $9) = $1,350 May 4 (65 @ $10) = $650 May 16 (120 @ $9.08) = $1,089.60 June 4 (50 @ $12) = $600

Balance (45 @ $8) = $360 (195 @ $8.77) = $1,710.00 (260 @ $9.08) = $2,360.80 (140 @ $9.08) = $1,270.40 (190 @ $9.84) = $1,870.40

Please note that rounding discrepancies may result in the above schedule depending on how the unit costs are rounded.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

166. Davis Company uses the perpetual inventory system and the FIFO inventory costing method. All purchases and sales were cash transactions. The records reflected the following for January, 20X2

Units Beginning Inventory Purchase, January 6 Sale, January 10 (at $2.40 per unit) Purchase, January 14 Sale, January 29 (at $2.60 per unit)

Unit Cost 100 200 110

$1.00 1.20

100 170

1.30

Determine the following

A. B. C. D.

20X2 goods available for sale 20X2 ending inventory 20X2 cost of goods sold Prepare the journal entries for January 6 and 10.

Please review the following information:

A. B. C. D.

20X2 goods available for sale 20X2 ending inventory 20X2 cost of goods sold Prepare the journal entries for January 6 and 10.

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$470 (400 units) $154 $316

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

A. $100 + 240 + 130 = $470 (400 units) B. $400 - 280 = 120 units; (100 at $1.30) + (20 at $1.20) = $154 C. $100 + 160 = 270 units; (100 at $1.00) + (10 at $1.20) + (170 at $1.20) = $316 D. January 6 January 10

Inventory Cash Cash (110 at $2.40 Sales Revenue Cost of goods sold Inventory*

240 240 264 264 112 112

*(100 at $1.00) + (10 at $1.20)

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Learning Objective: 07-02 Record inventory and cost of sales by using three inventory costing methods. Topic: 07-10 Recording Inventory Transactions in a Perpetual System Topic: 07-17 First-In, First-Out Method

167. Richardson Ltd. sells many products. Hela is one of its popular items. Below is an analysis of the inventory purchases and sales of Hela for the month of March. Richardson uses the perpetual inventory system.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Purchases Sales Units Unit Cost Units Selling March 1 Beginning inventory 200 $60 3 Purchase 60 75 4 Sales 70 $120 10 Purchase 200 82 16 Sales 80 130 19 Sales 80 130 25 Sales 50 130 30 Purchase 40 90

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Requirements: (a) Using the FIFO cost formula, calculate the amount of the cost of goods sold for March. (Show calculations) (b) Using the average cost formula, calculate the amount of the ending inventory on March 31. (Show calculations) (a) FIFO

Date Description Mar 1 Beginning 3 Purchase 4

Sale

Purchase

Purchases 60

$75

COGS

$4,500 70

$60

$4,200

Sale

4,800

Sale Sale

60 75 75 82

5,250

50 30 30 20

Purchase

Ending

200

16,400

3,890

3,600 280

(b) Average Cost

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$18,140

Ending Inventory 200 $60 $12,000 200 60 16,500 60 75 130 60 12,300 60 75 130 60 28,700 60 75 200 82 50 60 23,900 60 75 200 82 30 75 18,650 200 82 180 82 14,760 180 40 220

82 90

18,360 $18,360

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Date Description Mar 1 Beginning 3 Purchase 4 Sale 10 Purchase 16 Sale 19 Sale 25 Sale 30 Purchase 30 Ending

Purchases 60 200

$75

COGS

$4,500

70 $63.46

$4,442.20

80 80 50

5,837.60 5,837.60 3,648.50

16,400

72.97 72.97 72.97

3,600 280

$19,765.90

Ending Inventory 200 $60 $12,000 260 63.46 16,500.00 190 63.46 12,057.80 390 72.97 28,457.80 310 72.97 22,620.20 230 72.97 16,782.60 180 72.97 13,134.10 220 76.06 16,734.10 220 $16,734.10

Please note that rounding discrepancies may result in the above schedule depending on how the unit costs are rounded.

168. Solve for the missing amounts:

A Sales Cost of goods sold Inventory, beginning of year Inventory, end of year Average inventory Gross profit margin Inventory turnover Days in inventory

$100,000 (a) 23,000

$239,000 122,000 45,000

$438,000 345,000 (h)

17,000 (b) 46% (c) (d)

39,000 (e) (f) (g) 126

105,000 101,500 (i) (j) (k)

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Please review the following information:

A Sales Cost of goods sold Inventory, beginning of year Inventory, end of year Average inventory Gross profit margin Inventory turnover Days in inventory

$100,000 54,000 23,000

$239,000 122,000 45,000

$438,000 345,000 98,000

17,000 20,000 46% 2.7 135

39,000 42,000 49% 2.9 126

105,000 101,500 21% 3.4 107

169. Landings Inc. provided the following footnote in their annual report: Inventories are stated at the lower of cost or net realizable value. The cost of inventories has been determine during last in firstout(FIFO)method. Cost of goods ld under FIFO costing were $22.2 billion for 20X2 and ending inventory under FIFO was $1.3 billion. Inventory in 20X1 under FIFO costing was $1.2 billion. Compute the following for Landings:

1. Cost of Goods Available for Sale 2. Inventory turnover under FIFO costing for 20X2

_____ _____

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

1) 22.2 + 1.3 = 23.5 2) 22.2/((1.3 + 1.2)/2) = 17.76

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Learning Objective: 07-06 Evaluate inventory management by using the inventory turnover ratio, and analyze the effects of inventory on cash flows. Topic: 07-05 Cost of Sales Equation Topic: 07-27 Measuring Efficiency in Inventory Management

170. Divergent Technologies reported the following information in their 20X2 annual report: (In millions)

Net sales revenue Cost of sales December 31, 20X2 inventory December 31, 20X1 inventory

$15,540 8,960 1,650 1,380

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

1. Determine the inventory turnover ratio 2. Determine the average days to sell inventory 3. Explain the meaning of each number. 1. 5.91 ($8,960/$1,515) 2. 61.8 days (365 days/5.91) 3. The inventory turnover ratio identifies how many times the inventory was sold or liquidated during the year, while the average days to sell shows the volume of sales that can be supported in terms of number of days' stock on hand. As the inventory turnover increases, the company will carry less stock in terms of days' sales.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 07-06 Evaluate inventory management by using the inventory turnover ratio, and analyze the effects of inventory on cash flows. Topic: 07-27 Measuring Efficiency in Inventory Management

171. All Sports Inc. manufactures sporting equipment and clothing. Its recent annual report included the following on its statement of financial position: Consolidated Statements of Financial Position February 29, 20X2 and February 28, 20X1

Inventories Trade payables

20X2 20X1 $610,850,000 $560,330,000 $90,500,000 $85,800,000

In addition to the above statement of financial position information, All Sports Inc. reported cost of goods sold on its income statement of $53,800,000,000. Calculate the following:

1. Inventory purchased during 20X2 2. Cash paid to supplier during 20X2

_____ _____

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

1. $53,850,520,000 ($53,800,000,000 + ($610,850,000 minus $560,330,000), 2. $53,845,820, 000 ($53,850,520,000 minus ($90,500,000 minus $85,800,000)

172. The following information is available from recent financial statements of Competitor A and Competitor B:

Ending inventory Beginning inventory Cost of goods sold Sales

Competitor Competitor A B $6,031 $4,816 6,162 5,044 21,761 27,257 29,656 36,704

Requirement: (a) Calculate the inventory turnover and days in inventory for both companies. (b) What conclusion concerning the management of inventory can be drawn from these data? (a)

Inventory turnover Days in inventory

Competitor A $21,761 ($6,031 + $6,162) / 2 $21,761 $6,096.5 = 3.6 times 365 / 3.6 = 101 days

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Competitor B $27,257 ($4,816 + $5,044) / 2 $27,257 $4,930 = 5.5 times 365 / 5.5 = 66 days

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

(b) Competitor B's inventory turnover is approximately 53% [(5.5-3.6) ÷ 3.6)] higher than Competitor A's. In addition, Competitor B's days in inventory is 35% [(101-66) ÷ 101] lower than Competitor A's. Generally, a company prefers to maintain as high an inventory turnover as possible. Conclude that Competitor B manages inventory more effectively than Competitor A.

173. Give the journal entries for the transactions listed below under each of the two inventory systems. A. Purchase merchandise for cash, $1,000 B. Sold merchandise for $600 cash that had a cost of $480 (cost is 80% of the sales price for this company) C. Accepted a sales return from a customer: Sales price $30. A cash refund was given to the customer. The goods were returned to regular inventory D. Returned goods to the vendor because they did not meet our specification; $500 cash refund was received.

Perpetual Inventory Periodic Inventory Account Debit Credit Account Debit Credit A. B. C. D.

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Please review the following information:

A. B.

Account Merchandise Inventory Cash Cash Sales Revenue COGS Merchandise Inventory. Sales R&As Cash Merchandise inventory COGS Cash Merchandise Inventory

Perpetual Inventory Debit Credit Account 1,000 Purchases 1,000 Cash 600 Cash 600 Sales Revenue 480 480 30 Sales 30 R&As 24 24 500 Cash 500 PurchaseR&As

Periodic Inventory Debit Credit 1,000 1,000 600 600

30 30

500

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-10 Recording Inventory Transactions in a Perpetual System Topic: 07-29 Appendix 7A: Cost Flow Assumptions—Periodic Inventory System

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500

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

174. Beautiful World Company buys reusable water bottles at a unit cost of $10 and sells them at a unit price of $13. There was no beginning inventory. Provide the journal entries required below by entering the account code of the appropriate account and the amount for each debit and credit:

Account Name Inventory Purchases Cost of Goods Sold Sales Revenue Cash

Account Code A B C D E

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Debits Codes Amounts

Credits Codes Amounts

A. Purchased 100 units for cash assuming the perpetual inventory system is used B. Purchased 100 units for cash assuming the periodic inventory system is used C. Sold 100 units for cash assuming the perpetual inventory system is used D. Sold 100 units for cash assuming the periodic inventory system is used

Please review the following information:

C. D.

Debits Credits Codes Amounts Codes Amounts A 1,000 E 1,000

Purchased 100 units for cash assuming the perpetual inventory system is used Purchased 100 units for cash B assuming the periodic inventory system is used Sold 100 units for cash assuming the E perpetual inventory system is used C Sold 100 units for cash assuming the E periodic inventory system is used

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1,000 E

1,000

1,300 D 1,000 A 1,300 D

1,300 1,000 1,300

Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-10 Recording Inventory Transactions in a Perpetual System Topic: 07-29 Appendix 7A: Cost Flow Assumptions—Periodic Inventory System

175. Top TV Incorporated, a big box store that sells television sets, bought a large number of a television model at a cost of $500 per unit. The contract reads that if 2000 or more sets are purchased during the year, a rebate of $20 per set will be made. On December 15, the records showed that 1500 sets had been purchased; purchases were recorded at $750,000 (1500 ´ $500). All these units had been sold. Five hundred more sets were ordered FOB destination. The sets were received on December 22, and a request for there ate was made. The rebate cheque was received on January 25, after the books were closed. Furthermore, the supplier provides terms of 2/10, n/30. Top TV has a policy of always paying invoices within the discount period. Further investigation reveals that total of $17,600 of freight was paid to acquire the sets purchased this year, including $3,750 on the last order of 500 sets. Required: A. Calculate the ending inventory value at 31 December. B. What entry should be made relative to the rebate on 31 December? C. What entry would be made on 25 January? A. Cost per unit of inventory Less: 2% discount Less: quantity rebate Plus: Freight $3,750 ÷ 500

$500.00 -10.00 -20.00 7.50 477.50 × 500 units $238,750

Inventory level Total cost

B Accounts receivable (2000 × $20) Purchases

40,000 40,000

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

C. Cash Accounts receivable

40,000 40,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 07-01 Apply the cost principle to identify the amounts that should be included in inventory, and apply the matching process to determine the cost of sales for typical retailers, wholesalers, and manufacturers. Topic: 07-05 Cost of Sales Equation Topic: 07-10 Recording Inventory Transactions in a Perpetual System

176. Mineral Waters has used the FIFO cost flow assumption since it was first organized in 20X4. Results have been as follows:

Reported net income - FIFO Reported ending inventories FIFO Reported ending Inventories Average cost

20X4 $26,250

20X5 $45,000

20X6 $48,750

20X7 $67,500

82,250

142,000

164,000

173,000

78,500

101,650

117,500

135,500

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Chapter 07 - Reporting and Interpreting Cost of Sales and Inventory

Required: 1. Restate net income assuming use of the average cost method since the company's inception. 2. What inventory cost flow policy would you expect this company to adopt if it was trying to: a. Minimize income tax payments. b. Report maximum inventory values on the balance sheet. 1.

FIFO income Difference in beginning inventory Difference in ending inventory * Revised net income

20X4 $26,250 0

20X5 $45,000 3,750

20X6 $48,750 40,350

20X7 $67,500 46,500

(3,750)

(40,350)

(46,500)

(37,500)

$22,500

$8,400

$42,600

$76,500

* 20X4 $82,250 - $78,500 = $3,750 20X5 $142,000 - $101,650 = $40,350 20X6 $164,000 - $117,500 = $46,500 20X7 $173,000 - $135,500 = $37,500 2. a. Minimize income tax-Average cost (except in 20X7) b. Maximize inventory values-FIFO

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Chapter 08 Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

True / False Questions 1. An asset must be fully depreciated before it can be removed from the books. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 08-01 Define, classify, and explain the nature of long-lived assets, and interpret the fixed asset turnover ratio. Topic: 08-03 Measuring and Recording Acquisition Cost

2. A corporation may choose to list its operational assets in the current assets section of the statement of financial position. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 08-01 Define, classify, and explain the nature of long-lived assets, and interpret the fixed asset turnover ratio. Topic: 08-02 Classification of Long-Lived Assets

3. The fixed asset turnover ratio is computed by dividing profit by the average fixed assets amount. FALSE

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

4. Land improvements are not a depreciable asset. FALSE

5. One of the most important challenges facing managers is forecasting the level of productive capacity (fixed assets) needed in the long run to meet customer demand. TRUE

6. Operating expenditures are capitalized as incurred. FALSE

7. The cost allocation method utilized affects the amount of net property, plant, and equipment that is used in the computation of the fixed asset turnover ratio. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 08-01 Define, classify, and explain the nature of long-lived assets, and interpret the fixed asset turnover ratio. Topic: 08-02 Classification of Long-Lived Assets

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

8. Building and equipment are recorded at their cost at acquisition and are subsequently reported at cost less accumulated depreciation. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property, plant, and equipment. Topic: 08-03 Measuring and Recording Acquisition Cost

9. When an operational asset is acquired for non-cash consideration, the cost of the asset received always is measured as the book value of the non-cash consideration given up. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property, plant, and equipment. Topic: 08-04 Various Acquisition Methods

10. If a second-hand machine is purchased for operational use in a business, all renovation and repair costs on the used machine incurred by the purchaser prior to its operational use should be excluded from the cost of the asset. FALSE

11. Acquisition cost of property, plant, and equipment is the cash-equivalent purchase price plus all reasonable and necessary expenditures made to acquire and prepare the asset for its intended use. TRUE

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

12. Expenditures made after the asset is in use are always capital expenditures. FALSE

13. Behren Company purchased a building and the parcel of land on which the building was located for a total purchase price of $810,000. To record the acquisition, the account, Building, should be debited for $810,000. FALSE

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property, plant, and equipment. Topic: 08-04 Various Acquisition Methods

14. Because of depreciation, the net carrying amount of an asset declines over time and profit is reduced by the amount of the expense. TRUE

15. When a company acquires land by issuing 10,000 of its common shares currently trading for $20 per share, the company must get an appraisal of the land and recognize a gain if the appraised value is more than the $200,000 value of the shares issued. FALSE

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

16. A company that is self-constructing a new store, which will open upon completion, is permitted to capitalize the interest during the period of construction if they finance the construction with actual loans. TRUE

17. In conformity with the historical cost principle, cost (less any estimated residual value) is allocated to periodic expense over the periods benefited. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Topic: 08-12 Depreciation Concepts

18. The cost of a major addition to an operational asset should be recorded as an asset and depreciated over its useful life. TRUE

19. The residual value of an asset is always equal to the market value when it reaches the end of its useful life. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 08-05 Analyze the disposal of property, plant, and equipment. Topic: 08-23 Disposal of Property, Plant, and Equipment

8-5

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

20. When an asset is disposed all of its related accounts should be removed from the company's books. TRUE

21. Once an estimated useful life has been assumed for an asset it cannot be revised later on. FALSE

22. Asset disposal must be done at the end of a fiscal period and not during the period though asset acquisitions can be done at any time during the year. FALSE

23. If the depreciation is not up to date on an asset for disposal, the first step to dispose of this asset is to update depreciation. TRUE

8-6

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

24. When events or changes in circumstances reduce the estimated future cash flows of longlived assets below their book value, the book values should be written down (by recording a loss) to the fair value of the assets. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Topic: 08-22 Measuring Asset Impairment

25. An impairment loss is credited to accumulated depreciation. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Topic: 08-22 Measuring Asset Impairment

26. An item of property, plant, and equipment is considered to be impaired if its carrying amount exceeds its recoverable amount. TRUE

27. Ordinary repairs and maintenance of operational assets should be expensed. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property, plant, and equipment. Topic: 08-10 Repairs, Maintenance, and Betterments

8-7

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

28. Only the actual acquisition cost, the estimated useful life, and the method of depreciation of an operational asset are required to compute the depreciation expense for a period. FALSE

29. Depreciation and depletion conceptually are similar but they apply to different kinds of operational assets. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources, intangible assets, and goodwill. Topic: 08-12 Depreciation Concepts Topic: 08-25 Acquisition and Depletion of Natural Resources

30. One example of a capital expenditure is an oil change for a company truck. FALSE

31. Pete, the accountant, calculated depreciation expense on an asset omitting the asset's residual value. As a result, depreciation expense for the periods will be lower than it should have been. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Topic: 08-12 Depreciation Concepts

8-8

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

32. No clear line distinguishes capital expenditures (assets) from revenue expenditures (expenses); therefore, it requires managers to exercise judgment in making a subjective decision. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property, plant, and equipment. Topic: 08-10 Repairs, Maintenance, and Betterments

33. When Ford Motor Company expenses a $200 tool used in manufacturing, instead of capitalizing its cost as an asset, it does so because of the conservatism convention. FALSE

34. The purpose of amortization is to correctly value assets on the balance sheet. FALSE

35. The purpose of depreciation is to set aside a pot of money periodically to replace an existing asset when it gets worn and used up. FALSE

8-9

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

36. Land is recorded at cost, not depreciated and periodically requires an adjustment to reflect current market value. FALSE

37. Carrying amount (or net book value) is always the same as market value. FALSE

38. The book value of an operational asset initially declines less rapidly under the straight-line method than under the declining-balance method. TRUE

39. When using the declining-balance method of depreciation, a declining percentage is applied to a constant book value. FALSE

8-10

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

40. The straight-line depreciation method assumes an approximately equal decline in the economic usefulness of the asset each period and provides greater tax benefits early in the useful life of the asset. FALSE

41. Accelerated depreciation methods are desirable from the income tax point of view because the asset will produce a greater profit when it is new (the early years) than when it is older (the later years). TRUE

42. A change in the estimated residual value of property, plant, and equipment only affects future years. TRUE

43. When a change in depreciation estimate is made, previously recorded amounts in depreciation expense and accumulated depreciation need to be re-stated. FALSE

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

44. The declining-balance method of depreciation is appropriate for companies that expect their equipment or other assets to become obsolete rapidly. TRUE

45. Regardless of the method of depreciation used under international financial reporting standards, the ending book value will be the same at the end of the asset's economic life. TRUE

46. The estimate of residual value made at the beginning of the useful life has no relationship to the book value at the end of the asset's useful life. FALSE

47. Impairment losses on goodwill are never reversed. TRUE

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

48. If an acquired franchise is intended to provide benefits for an indefinite time period, then the cost of the asset should still be amortized. FALSE

49. If the proceeds from the sale of equipment exceed its carrying amount, a gain on disposal is reported. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 08-05 Analyze the disposal of property, plant, and equipment. Topic: 08-23 Disposal of Property, Plant, and Equipment

50. A loss on disposal results if the proceeds received from the asset sale are less than the asset's carrying amount. TRUE

51. When an asset is retired, a gain or loss must be recorded. FALSE

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

52. If a building is sold at a gain, the gain on disposal should be reported in the investing section of the cash flow statement. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 08-07 Explain the impact on cash flows of the acquisition, use, and disposal of long-lived assets. Topic: 08-26 Acquisition and Amortization of Intangible Assets

53. Acquiring and disposing of long-lived assets are considered financing activities on the cash flow statement. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 08-07 Explain the impact on cash flows of the acquisition, use, and disposal of long-lived assets. Topic: 08-18 Changes in Depreciation Estimates

54. Depreciation expense does not require a cash payment. TRUE

55. The cost of a patent should be amortized over the shorter of its economic life and its remaining legal life. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources, intangible assets, and goodwill. Topic: 08-26 Acquisition and Amortization of Intangible Assets

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

56. The cash flows from the purchase and sale of long-lived assets are reported in the investing activities section of the cash flow statement. TRUE

57. When assets are disposed of through sale or abandonment, we may need to record additional depreciation since the last adjustment was made. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 08-05 Analyze the disposal of property, plant, and equipment. Topic: 08-23 Disposal of Property, Plant, and Equipment

58. The fixed asset turnover ratio measures how much profit is generated by use of operational (fixed) assets. FALSE

59. When an entire business is purchased, goodwill is the excess of purchase price over the cost of the net identifiable assets acquired. FALSE

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

60. Most research costs should be capitalized when incurred. FALSE

61. If a trademark is developed internally, it cannot be recognized as an intangible asset on the statement of financial position. TRUE

62. The cost principle should be applied in recording the acquisition of natural resources and intangible assets. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources, intangible assets, and goodwill. Topic: 08-26 Acquisition and Amortization of Intangible Assets

63. Natural resources should be depleted (usually by the units-of-production method) usually with the amount of the depletion expense capitalized to a revenue account. FALSE

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

64. Research costs are an example of intangible assets. FALSE

65. The cost of a finite life intangible asset is not amortized, but the asset is tested for impairment. FALSE

Multiple Choice Questions 66. Operational assets do not include which of the following kinds of assets? A. Plant and equipment in use. B. Land held for resale. C. Patents in use. D. Mineral deposits being mined.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

67. Which of the following is not a tangible capital asset? A. Buildings B. Equipment C. Copyrights D. Land

68. Which of the following is not a major characteristic of a property, plant, and equipment asset? A. Possesses physical substance B. Yields services over several years C. Acquired for resale D. Acquired for use

69. Which of the following costs would normally not be included in the cost of equipment? A. Insurance for equipment after it has started being used. B. Installation of equipment. C. Testing of equipment. D. Freight paid by buyer to have equipment shipped.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

70. What are operational assets that have physical substance called? A. Long-term investments. B. Tangible assets. C. Intangible assets. D. Current assets.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 08-01 Define, classify, and explain the nature of long-lived assets, and interpret the fixed asset turnover ratio. Topic: 08-02 Classification of Long-Lived Assets

71. Tangible assets include which of the following? A. Land, buildings, and leaseholds. B. Land, buildings, and equipment. C. Natural resources, buildings, and franchises. D. Licenses, trademarks, and land.

72. Intangible assets include which of the following? A. Buildings, patents, and trademarks. B. Trade receivables, franchises, and trademarks. C. Copyrights, licenses, and land. D. Leaseholds, patents, and copyrights.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

73. Which of the following would be classified as an operational (fixed) asset? A. Land purchased and held for sale by a realtor. B. Land purchased and held for development by Wal-Mart as a new store site. C. Land and buildings owned by Toys "R" Us that are store sites closed due to restructuring and consolidating operations. D. A Ford Motor Company plant used to manufacture the Focus line in Oakville, Ontario.

74. On March 1, Chapin Company purchased a new stamping machine for $5,000. Chapin paid cash for the machine. Other costs associated with the machine were: transportation costs, $300; sales tax paid, $200; and installation cost, $100. What cost was recorded for the machine? A. $5,000 B. $5,200 C. $5,500 D. $5,600 Calculation: $5,000 + $300 + $200 + $100 = $5,600.

75. Which of the following would be an example of a land improvement? A. Land transfer tax paid on purchase of the land B. Costs of grading the land before building C. Costs of digging the hole for the foundation D. Costs of installing lighting

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

76. To which account should the amount of sales tax paid on the purchase of new machinery be debited? A. The sales tax expense account. B. The separate deferred charge account. C. The machinery account. D. The accumulated depreciation for machinery account.

77. Airbury Company acquired manufacturing equipment at an invoice price of $80,000 and paid $750 to have it delivered to the factory. $400 was spent to repair a door that was damaged while installing the equipment. At what amount should this equipment be recorded on the company's books? A. $80,000 B. $80,400 C. $80,750 D. $81,150 Calculation: $80,000 + $750 = $80,750.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

78. Martinelli Company recently purchased a truck. The price negotiated with the dealer was $85,000. Martinelli also paid sales tax of $6,000 on the purchase, shipping and preparation costs of $950, and insurance for the first year of operation of $2,000. For the truck, what amount should be debited to the asset account Vehicles? A. $85,000 B. $85,950 C. $91,000 D. $91,950 Calculation: $85,000 + $6,000 + $950 = $91,950.

79. Under IFRS, a corporation may capitalize interest for: A. Any asset that it purchases. B. Any asset that it purchases with debt. C. Only assets that are constructed or acquired over time. D. Any asset that is either purchased or constructed

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

80. Belmont Corporation made a basket purchase of land, a building and equipment, paying a total of $1,500,000. Market values for the assets were not available, but the appraised values were $300,000 for the land, $900,000 for the building, and $600,000 for equipment. What amounts should be recorded in the Land, Building, and Equipment accounts, respectively? A. $300,000, $900,000, and $600,000 B. $1,500,000, $-0-, and $-0C. $250,000, $750,000, and $500,000 D. $500,000, $500,000, and $500,000 Calculation: $300/$1,800 ´ $1,500,000 = $250,000; $900/$1,800 ´ $1,500,000 = $750,000; $600/$1,800 ´ $1,500,000 = $500,000.

81. When determining whether to capitalize or expense an amount relating to fixed assets, which of the following is not relevant to the decision? A. Matching principal B. Income tax rules C. Materiality concept D. Revenue recognition principal

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

82. Los Mi–os purchased a large tract of land with the intention to transform it into a cocoa plantation. Before the new seedlings can be planted, the site, which is prone to flooding, must be drained. The cost of the draining should be A. expensed immediately. B. capitalized as part of the cost of the land. C. expensed only after the first crop of has been harvested. D. reported as an operating loss.

83. If a plant asset is acquired by the issuance of a public company's common shares, the cost of the plant asset should be measured by the A. market value of the shares B. book value of the shares C. stated value of the shares D. the par value of the shares

84. A municipality has decided to donate a plant site to a local manufacturer that plans to open a new factory and create jobs. The donated plant site should be recorded on the manufacturer's books at A. its market value. B. the nominal cost of taking title to it. C. the value assigned by the company's directors. D. one dollar (since the site cost nothing but should be included in the balance sheet).

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

85. Which of the following costs would be excluded from the acquisition cost of equipment purchased from a supplier? A. Cost to install the equipment. B. The cost of freight paid to get the equipment to our factory. C. The cost to widen an entrance in the building to bring the equipment into the facilities. D. A purchases discount offered by the supplier.

86. The Land account would include all of the following costs except A. drainage costs. B. the cost of building a fence. C. title fees. D. the cost of tearing down a building.

87. Which of the following would not be included in the acquisition cost of a building? A. An apportioned amount of the purchase cost when both the land and building are acquired in a basket purchase. B. The cost of putting new windows and doors in the building before it opens for operations. C. The cost of paving the parking lot and outdoor lighting in the lot. D. The cost of paying an architect to design the re-modelling modifications of the building before the store opens.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

88. When may a company include interest costs as part of the cost of the asset? A. When they buy a piece of equipment and finance its acquisition by a bank loan. B. When they must borrow money to finance the manufacture of their inventory items. C. When they are self-constructing a piece of equipment they will use to manufacture their products, but only during the period of construction. D. Interest is never allowed to be capitalized.

89. Johnson Company acquires land and building for $4,000,000 including all fees related to acquisition. The land is appraised at $2,700,000 and the building at $2,100,000. The building is then renovated at a cost of $750,000. What amount is capitalized to the building account? A. $2,078,125 B. $2,500,000 C. $2,375,000 D. $4,000,000 Calculation: ($4,000,000 ´ $2,100/$4,800) + $750,000 = $2,500,000.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

90. A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true? A. The cost of the building will not include the repainting and re-carpeting costs. B. The cost of the building will include the cost of replacing the roof. C. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements. D. The wiring is part of the computer costs, not the building cost.

91. Jeffers Inc. purchased a warehouse and the land upon which it was located. The total price was $450,000. The land was appraised for $180,000 while the warehouse was appraised for $360,000. What account balances should Jeffers show in its general ledger? A. Land $180,000; Warehouse $360,000 B. Land $150,000; Warehouse $300,000 C. Land $166,667; Warehouse $333,333 D. Land $150,000; Warehouse $350,000 Calculation: $180,000/($180,000 + $360,000) = 33.33% ´ $450,000 = $150,000 $360,000/($180,000 + $360,000) = 66.67% ´ $450,000 = $300,000.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

92. What is an extraordinary repair to a building? A. It is a revenue expenditure and it is debited to an expense account. B. It is a capital expenditure and it is debited to an asset account. C. It is a capital expenditure and it is debited to an expense account. D. It is a revenue expenditure and may be debited to accumulated depreciation.

93. In 20X2, Gamma Company made an ordinary repair to a delivery truck at a cost of $300. Gamma's accountant debited the asset account, Delivery Vehicles. Was this treatment an error, and if so, what will be the effect on the financial statements of Gamma? A. The repair was accounted for correctly. B. The error increased assets and profit in 20X2. C. In the years following 20X2, net income will be too high. D. The error decreased profit in 20X2.

94. How should an expenditure for an ordinary repair to factory equipment be recorded? A. As an expense in the period incurred. B. Debited to an asset account but not depreciated over future years. C. Debited to an asset account and depreciated over the current and future years. D. Debited to accumulated depreciation.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

95. If a company classifies an expenditure as a capital expenditure instead of a revenue expenditure, which of the following will be false? A. Profit for the year of acquisition will be higher. B. The initial cost basis of the asset will be higher. C. Depreciation expense will be higher over the asset's life. D. It will be expensed in the year in which the expenditure takes place.

96. Which of the following would most likely not be a revenue expenditure? A. Replacing carpet in the sales department offices. B. Repairing a leaky roof. C. Putting a hydraulic lift on our delivery truck making it easier and quicker to deliver appliances. D. Painting the exterior of our store.

97. Which of the following is not a factor affecting the calculation of straight-line depreciation? A. Useful life. B. Residual value. C. Carrying amount. D. Cost.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

98. With respect to depreciation policies, the principle of consistency means: A. a company should disclose on the financial statements the depreciation method for all its capital assets. B. a company should use the same depreciation method from year to year for a given capital asset. C. a company should use the same depreciation methods as other companies in the same industry. D. a company should use the same depreciation method in computing depreciation expense on all its assets.

99. AA Riser owns machinery for moving and delivering plants to its customers. The recorded cost of the machinery is $38,000. It is estimated that the machinery will be able to move 120,000 plants over its life. The company depreciates the machinery using straight-line depreciation over a useful life of twelve years and an estimated residual value of $2,000. The amount that will be charged annually as depreciation will be: A. $3,167 B. $3,000 C. $3,800 D. $3,600 Calculation: ($38,000 - $2,000) ÷ 12 = $3,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Topic: 08-13 Alternative Depreciation Methods

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

100. Nadler Inc. purchased equipment for $48,000 and estimated that the equipment will have a $4,000 residual value at the end of its 8-year useful life. Using the double-declining-balance method, the depreciation expense for the third year would be A. $9,000 B. $6,750 C. $6,188 D. $5,500 Calculation: [$48,000 ´ (2 ÷ 8)] = $12,000 First year [($48,000 - $12,000) ´ (2 ÷ 8)] = $9,000 Second year [(48,000 - $12,000 - $9,000) ´ (2 ÷ 8)] = 6,750 Third year.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Topic: 08-13 Alternative Depreciation Methods

101. The depreciable amount is: A. the original cost less the accumulated amortization. B. the original cost less any residual value. C. the accumulated amortization less residual value. D. the net present value.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

102. The concept of depreciation is best explained by which accounting principle or assumption? A. Cost principle. B. Going concern assumption. C. Expense recognition. D. Economic entity assumption.

103. In accounting for tangible operational assets, the continuity assumption is important because of which of the following? A. It helps a company decide whether to use straight-line depreciation or an accelerated depreciation method. B. It justifies depreciating the asset over its expected useful life, without anticipating that the business will liquidate in the near future. C. It provides justification for including residual values in calculating depreciation. D. It is consistent with maintaining assets in the accounting records at market value rather than acquisition cost.

104. The apportionment of the acquisition cost of an operational asset to future periods in which the benefits contribute to earning revenue must be which of the following? A. Random. B. Impaired. C. Revised annually. D. Rational.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

105. What is the book value of a tangible operating asset? A. Acquisition cost. B. Current estimated market value. C. Acquisition cost minus the balance in accumulated depreciation. D. Total depreciation that has been recorded on the asset to date.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Topic: 08-11 Use, Impairment, and Disposal of Property, Plant, and Equipment

106. A machine, acquired for a cost of $6,000, is being depreciated on a straight-line basis of $900 per year. The residual value was estimated to be 10% of cost. What was the estimated useful life? A. 3 years B. 4 years C. 5 years D. 6 years Calculation: ($6,000 ´ 90%) ÷ $900 = 6.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

107. On January 1, 20X3, a machine with a useful life of five years and a residual value of $2,500 was purchased for $25,000. Using the double-declining-balance method, the depreciation expense for the year ending December 31, 20X4 would be A. $10,000 B. $9,000 C. $6,000 D. $5,400 Calculation: [$25,000 ´ (2 ÷ 5)] = $10,000 First year [($25,000 - $10,000) ´ (2 ÷ 5)] = $6,000 Second year.

108. A machine that cost $72,000 has an estimated residual value of $6,000 and an estimated useful life of 5 years or 30,000 hours. Using the units-of-production method, the depreciation expense for the second year, during which the machine was used 5,000 hours, would be A. $14,400 B. $13,200 C. $12,000 D. $11,000 Calculation: (($72,000 - $6,000) ÷ 30,000) ´ 5,000 = $11,000.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

109. Newson's Courier Service recently purchased a new delivery van for $29,000. The van is estimated to have a useful life of 8 years or 250,000 kilometers. The van will have a residual value of $1,000. The company uses the units-of-production method of depreciation. Assuming the van travelled 36,000 kilometers. during the first year, what is the depreciation expense for the van in year 1? A. $3,625 B. $3,500 C. $4,032 D. $4,176 Calculation: (($29,000 - $1,000) ÷ 250,000) ´ 36,000 = $4,032.

110. On September 1, 20X3, Sitco Limited purchased an asset for $9,000, with a $1,500 estimated residual value, and an 8-year useful life. The 20X3 depreciation expense using the double-declining-balance method would be: A. $625 B. $750 C. $1,875 D. $2,250 Calculation: [$9,000 ´ (2 ÷ 8) ´ (4 ÷ 12)] = $750.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

111. An asset being amortized with the straight-line method has a residual value of $20,000 and amortization expense of $25,000 in its second year. What was the original cost of the asset if its useful life was 10 years? A. $185,000 B. $200,000 C. $250,000 D. $270,000 Calculation: ($25,000 ´ 10) + $20,000 = $270,000.

112. Trumble Company purchased a machine on January 1, 20X2, for $10,000. The company bookkeeper incorrectly used a six-year life instead of a five-year life to depreciate the machine. What would be the effect of this error on the 20X2 financial statements? A. Overstatement of assets offset by an understatement of shareholders' equity. B. Overstatement of assets offset by an understatement of retained earnings. C. Overstatement of assets, profit, and shareholders' equity. D. Overstatement of assets and an understatement of liabilities.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

113. Sure Company purchased a machine on January 1, 20X1, at a cash cost of $12,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the declining-balance method based on a 150 percent acceleration rate. What will be the depreciation expense for the second year? A. $900 B. $1,350 C. $1,530 D. $1,800 Calculation: [$12,000 - ($12,000 ´ 1.5 ´ 10%)] ´ 1.5 ´ 10% = $1,530.

114. Bangor Industries purchased a car for $22,000 on January 1, 20X1. The car had an estimated useful life of 80,000 kilometers and an estimated residual value of $4,000. In the second year of ownership (20X2), the car was driven 25,000 kilometers. Using the units-ofproduction method, what was the amount of depreciation expense for 20X2? A. $4,500 B. $5,000 C. $5,625 D. $6,875 Calculation: ($22,000 - $4,000) ÷ 80,000 ´ 25,000 = $5,625.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

115. A company decided to use the units-of-production method to calculate depreciation on a car to be driven by the sales manager. The amount of annual depreciation will vary with which of the following? A. Age of the car. B. Balance in accumulated depreciation. C. Number of kilometers the car is driven. D. Amount of maintenance expense incurred on the car.

116. A depreciable asset that cost $100,000 had an estimated useful life of 5 years and estimated residual value of $10,000. What is the first year for which depreciation would be greater under the straight-line method than under the declining-balance method with an acceleration rate of 200%? A. The first year. B. The second year. C. The third year. D. The fourth year. Calculation: Straight-line: ($100,000 - $10,000) ÷ 5 = $18,000 per year; declining-balance: $100,000 ´ 2 ´ 20% = $40,000 first year; $60,000 ´ 2 ´ 20% = $24,000 second year; $36,000 ´ 2 ´ 20% = $14,400 third year.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

117. Most companies keep separate sets of accounting records for financial reporting and for income tax computations. Which of the following statements is true? A. They do it even though this practice is illegal and in violation of international financial reporting standards. B. They do it because the Income Tax Act requires companies to keep separate records for tax purposes. C. They do it because financial reporting rules and income tax regulations differ in many ways. D. They do it to enable a company to do a reconciliation between taxable income and reported profit.

118. Belton Corporation uses straight-line depreciation and, for assets acquired during the fiscal year, follows the policy of recording a full month's depreciation for all assets acquired on or before the 15th of the month. No depreciation is recorded for the month if an asset is acquired after the 15th. On May 22, 20X1, Belton purchased a car that cost $22,000 which had an estimated residual value of $2,000 and an estimated useful life of five years. To the nearest dollar, what is the amount of depreciation that should be recorded on the car for 20X1? A. $2,000 B. $2,333 C. $2,667 D. $4,000 Calculation: [($22,000 - $2,000) ÷ 5] ´ 7/12 = $2,333.

Eastern Fisheries Co. purchased equipment on January 1, 20X1 for $22,500. The equipment had an estimated useful life of 10 years and an estimated residual value of $2,500. The company uses double-declining-balance depreciation.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

119. Assuming Eastern uses double-declining-balance depreciation, what would be the depreciation expense for 20X1? A. $2,000 B. $2,250 C. $4,500 D. $3,500 1/10 =10% ´ 2 = 20% ´ $22,500 = $4,500.

120. Assuming Eastern uses straight-line depreciation, what would be the book value of the machine ten years later, on December 31 A. $ -0B. $2,350 C. $2,250 D. $2,500 $22,500 - ($20,000/10 ´ 10 yrs) = $2,500.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

121. Assuming Eastern uses double- declining-balance depreciation, what would be the book value of the machine on December 31 20X2? A. $18,000 B. $14,400 C. $17,750 D. $20,000 $22,500 - ($22,500 ´ 20%) - ($18,000 ´ 20%) =$14,400.

122. Angstrom Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five years and estimated residual value of $5,000. At the beginning of year three, Angstrom's managers concluded that the total useful life would be four years, rather than five. There was no change in the estimated residual value. What is the amount of depreciation that Angstrom should record for year 3 under the straight-line method? A. $8,250 B. $11,000 C. $15,500 D. $16,500 Calculation: ($60,000 - {[($60,000 - $5,000) ÷ 5] ´ 2} - $5,000) ÷ 2 = $16,500.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

123. Recording depreciation expense does which of the following? A. It reduces both profit and the amount of cash generated by a company. B. It does not affect profit or the amount of cash generated by a company. C. It reduces profit and increases the amount of cash generated by a company. D. It reduces profit but does not affect the amount of cash generated by a company.

124. Helm Corporation purchased a machine with an initial cost of $80,000, a residual value of $5,000, and an estimated useful life of 10 years. At the beginning of the fifth year, Helm spent $10,000 for an extraordinary repair. Following the repair, Helm estimated that the machine had a remaining useful life of 8 years, and that the residual value was unchanged. Calculate depreciation expense on the machine for the fifth year, assuming that Helm uses the straight-line method. A. $5,625 B. $6,875 C. $7,250 D. $7,500 Calculation: ($80,000 - $5,000) ÷ 10 = $7,500; $80,000 - ($7,500 ´ 4) = $50,000; ($50,000 + $10,000 - $5,000) ÷ 8 = $6,875.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

125. How is the matching principle related to the recording of depreciation on tangible operational assets? A. The matching principle requires a company to use the same depreciation. B. Once a depreciation method is adopted for a particular asset, the owner must continue to use the same method. C. The accountant who calculates the depreciation may assume that the company will continue in business at least as long as the estimated useful life of the asset. D. A portion of the cost of the asset should be allocated as an expense for the periods in which the asset helps the business to earn revenue.

Hershon Inc. acquires a new machine. It is comprised of 2 different identifiable components the P922 and the B14. Each of these components is expected to be overhauled at different intervals. The acquisition cost of the entire machine is as follows:

Component P922: Component R14: Total

$198,000 $240,000 $438,000

Component P922 is expected to have a useful life of five years and a residual value of $20,000 before the first major overhaul is required. Component R14 is expected to have a useful life of seven years and a residual value of $15,000 before its first overhaul.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

126. Assuming straight-line depreciation, what will be the net book value of component P922 at the end of year five? A. $18,000 B. $20,000 C. $15,000 D. $22,000

127. At the beginning of year six, component P922 undergoes a major overhaul at a cost of $100,000. The work is expected to extend its life by 3 years with a residual value of zero. Hershon uses the straight-line method to depreciate this asset. What will be the net book value of component P922 one year after the overhaul? A. $66,667 B. $40,000 C. $120,000 D. $80,000

128. Assuming, the double declining balance is used, what will be the net book value of component R14 at the end of year one? A. $205,321 B. $179,455 C. $171,429 D. $140,000

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

129. Fraser Ltd. has decided to change the estimate of the useful life of an asset that has been in service for two years. Which of the following statements describes the proper way to revise a useful life estimate? A. Revisions in useful life are permitted if approved by Canada Revenue Agency. B. Both the current and future years will be affected by the revision. C. Retroactive changes must be made to correct previously recorded depreciation. D. Only future years will be affected by the revision.

130. Under what conditions would a company most likely adopt the double-declining-balance method for financial reporting? A. They have high technology, robotic equipment in their plant that have a long usable life. B. They have a fleet of trucks where repair costs increase annually as the fleet ages. C. They expect the asset to lose its value more rapidly in the first few years of its life. D. They expect the asset to lose its value in a huge portion after some years of its use.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Topic: 08-19 Managers' Selection among Accounting Alternatives

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

131. Barnes Company purchased a machine on April 4, 20X1, for $210,000. The machine had an estimated useful life of five years and a salvage value of $30,000. The machine is being depreciated using the double-declining-balance method. Barnes depreciates its assets from the first day of the month nearest the date of purchase. The asset balance, net of accumulated depreciation, at December 31, 20X2, would be: A. $75,600 B. $88,200 C. $94,800 D. $105,600 20X1: Dep'n Expense = [210,000 ´ 2/5] ´ 9/12 = $63,000 20X2: Dep'n Expense = (210,000 - 63,000) ´ 2/5 = $58,800 Total = $121,800 Thus, the asset balance (net of accumulated dep'n), at December 31, 20X2, should be $88,200 ($210,000 - $121,800).

132. Marker Steel purchased a machine on January 1, 20X1, at a cost of $380,000 with an estimated residual value of $30,000 at the end of its estimated useful life of eight years. On January 1, 20X3, Proctor Paper estimates that the machine only has a remaining life of five years and a residual value of $20,000. Proctor Paper uses straight-line amortization. Depreciation expense for 20X3 would be: A. $54,500 B. $55,000 C. $48,500 D. $57,000 $380,000 - $30,000 = $350,000/8 yrs = $43,750 ´ 2 yrs = $87,500 Net Book Value = $292,500-$20,000/5 yrs = $54,500.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

133. Which of the following statements is false? A. A company can change the method used for depreciating assets if the change can be justified because it provides a better measure of the company's profit. B. A change in estimate requires the company to recalculate and restate all the prior years' estimates of depreciation and adjust the impact on the statement of financial position and income statement. C. A change in estimate is frequently necessary because the estimates of useful lives or residual values may change over time because conditions change. D. Either a change in estimate or a change in method can only be justified on the basis it provides a better measure of profit.

134. Which of the following statements is false? A. Depreciation expense is added to profit in the operating activities section of the statement of cash flows because it had no cash effect on profit under the indirect method. B. Depreciation expense is included in the investing activities section of the cash flow statement. C. The only cash effect for depreciation is the tax savings provided by its deduction to derive taxable income. D. Depreciation is a non-cash expense that reduces profit but involves no outflow of cash.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

135. WD Company reports profit in 20X3 of $1,300 million and depreciation expense of $851 million. They also report investment in new theme parks, resorts, and other property of $2,134 million for 20X3. Which of the following disclosures would appear on their statement of cash flows? A. Depreciation of $851 million would be deducted from profit under operating activities and the $2,134 million would be added under investing activities. B. Depreciation of $851 million would be added to profit under operating activities and the $2,134 million would be added under investing activities. C. Depreciation of $851 million would be added to profit under operating activities and the $2,134 million would be deducted under investing activities. D. Depreciation of $851 million would be deducted from profit under operating activities and the $2,134 million would be deducted under investing activities.

136. Dionne Developments. owns a piece of land it had purchased in 20X4 for $600,000. When they started to develop the land in 20X5, they discovered that there were environmental problems with the land. It is now estimated to be worth only $250,000. Which of the following is the correct way to account for this? A. The land should be amortized at a new rate to reflect the decline in its value B. No accounting is necessary because the land is recorded at its historical cost, not its market value. C. The land should be written off completely because now the company cannot use it for the purpose they intended to. D. The land account should be written down to $150,000 and a loss recognized.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

137. Barton Iron Ore, owns the following equipment:

Carrying amount Value in use Fair value less selling costs

$80,000 $68,000 $72,000

The recoverable amount to be used in the determination of impairment is A. $80,000 B. $68,000 C. $72,000 D. Cannot be determined Recoverable amount is the higher of Fair value and value in use.

138. Raysion Company, a public corporation, owns equipment for which the following yearend information is available:

Carrying amount Recoverable amount

$59,000 $52,000

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Which of the following best describes the proper accounting treatment for Magenta's equipment? A. It is impaired, a loss must be recognized, and may not be reversed in future periods. B. It is impaired, a loss must be recognized, but may be reversed in future periods. C. The equipment is not impaired. D. It is not impaired and a loss should not be recognized Recoverable amount is lower than carrying amount therefore the asset must be written down, but may be reversed in the future.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Topic: 08-22 Measuring Asset Impairment

139. Which of the following is not a likely indicator of possible asset impairment? A. Evidence of obsolescence B. A decrease in the asset's market value C. Double the number of asset purchases over the prior year. D. External competitive factors

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

140. The records of Pam Company showed the following about a machine on January 1, 20X8: Purchased 1/1/20X5 for $35,000 Accumulated depreciation at January 1, 20X8, $26,400 On July 1, 20X8, the machine was sold for $7,000. Depreciation for the first six months of 20X8 was $1,467. The gain or loss on disposal would be which of the following? A. $133 loss. B. $133 gain. C. $1,600 loss. D. $1,600 gain. Calculation: $7,000 - ($35,000 - $26,400 - $1,467) = -$133.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 08-05 Analyze the disposal of property, plant, and equipment. Topic: 08-23 Disposal of Property, Plant, and Equipment

141. Foghorn Ltd. has an asset with an original cost of $16,000 and a carrying amount (net book value) today of $4,400. The Company no longer needs the asset and has decided to sell it today for $3,000 cash. The journal entry Foghorn will use to record the sale includes: A. a credit to the asset account for $4,400. B. a debit to the asset account for $4,400. C. a debit to accumulated amortization for $11,600. D. a credit to cash account for $3,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 08-05 Analyze the disposal of property, plant, and equipment. Topic: 08-23 Disposal of Property, Plant, and Equipment

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

142. C&L Company purchased a computer that cost $10,000. It had an estimated useful life of five years and residual value of $0. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. Which of the following should C&L record? A. A gain of $1,000. B. A loss of $1,000. C. A gain of $3,000. D. Neither a gain nor a loss Calculation: $3,000 - [$10,000 - ($10,000 ´ 4/5)] = $1,000.

143. On April 1, 20X4, Michal Company sold equipment for $11,400 cash. The equipment had originally been purchased at a cost of $24,000 on January 1, 20X0. The equipment was expected to a useful life of 8 years with no residual value. As of January 1, 20X4, had accumulated depreciation of $12,000. The entry to record the sale of the equipment was:

Cash Accumulate d Depreciatio n Gain on Sale of Machine Machine

11,400 12,750

150 24,000

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Cash Accumulate d Depreciatio n Loss on Sale of Machine Machine

11,400 12,000

Cash Depreciatio n Expense Accumulate d Depreciatio n Gain on Sale of Machine Machine

11,400 750

Cash Loss on Sale of Machine Machine

11400 600

600 24,000

12,000

150 24,000

12,000

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

A. Choice A B. Choice B C. Choice C D. Choice D

144. When an asset is retired, the amount of the gain is equal to: A. the asset's carrying amount. B. the difference between the carrying amount and the proceeds. C. the accumulated depreciation. D. the amount of cash received.

145. On July 1, 20X0, FEDWHY sold a truck for $10,000. The company originally paid $28,000 on June 30, 20X7 and has recorded accumulated depreciation on it to date of $15,000. The entry to record the sale would include a: A. debit to trucks for $28,000 B. credit to accumulated depreciation for $15,000. C. credit to gain on sale of truck for $3,000. D. debit to loss on sale of truck for $3,000. $10,000 - ($28,000-$15,000) = -$3,000.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

146. Upon the disposal of an asset, if the proceeds are greater than the carrying value of the asset the company must: A. recognize a loss B. adjust the carrying value to market value C. recognize a gain D. adjust the accumulated depreciation account so the carrying value equals the proceeds

147. During 20X0, Time & Tenders Co. sold equipment that had cost $206,000 for $127,600. This resulted in a gain of $9,600. The total balance in accumulated depreciation-equipment was $660,000 on January 1 20X0, and $630,000 on December 31. No other equipment was disposed of during 2010. Depreciation expense for 2010 was A. $101,000 B. $38,600 C. $59,600 D. $58,000 Accumulated dep'n of disposal = $127,600 - ($9,600+$206,000) = $88,000 so $660,000 $88,000 + dep'n expense = $630,000 = $58,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 08-05 Analyze the disposal of property, plant, and equipment. Topic: 08-13 Alternative Depreciation Methods Topic: 08-23 Disposal of Property, Plant, and Equipment

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

148. On March 1, 20X1, Jance Company purchased a producing oil well at a cash cost of $100,000. It is estimated that 250,000 barrels of oil can be produced over the remaining life of the well. By December 31, 20X1 (end of the accounting period), 1,500 barrels of oil were produced and sold. What would be the amount of depletion expense for 20X1 on this well? A. $300 B. $450 C. $600 D. $750 Calculation: ($100,000 ÷ 250,000) ´ 1,500 = $600.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources, intangible assets, and goodwill. Topic: 08-25 Acquisition and Depletion of Natural Resources

149. On January 1, 20X3, Stacy Company purchased the College Book Store for $350,000. At the date of purchase, it was determined the recorded assets had a total market value of $325,000, comprised of inventory (books), $275,000; fixtures, $30,000; and other assets $20,000. It is estimated that the goodwill (if any) has an economic useful life of 20 years. What is the amount of amortization expense for goodwill for 20X3? A. $1,250 B. $0 C. $16,250 D. $17,500

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

150. Carpenter Corporation purchased a mineral deposit, making payment as follows: Cash $10,000 and 6,000 Carpenter Corporation common shares. On the date of the purchase, the mineral deposit had an appraised value of $75,000; the common shares were quoted on the market at $11 per share. Other acquisition costs amounted to $3,000 cash. What was the cost recorded for the mineral deposit? A. $70,000 B. $73,000 C. $75,000 D. $79,000 Calculation: $10,000 + (6,000 ´ $11) + $3,000 = $79,000.

151. In January, 20X7, Barton Iron Ore purchased a mineral mine for $5.1 million with removable ore estimated by geological surveys at 2 million tons. The property has an estimated value of $300,000 after the iron ore has been extracted. The company incurred $1.5 million of development costs preparing the mine for production. During 20X7, 400,000 tons were sold. What is the amount of depletion that Pratt should expense for 20X7? A. $1,200,000 B. $1,320,000 C. $1,020,000 D. $960,000 $6,600,000 - $300,000)/2,000,000 units = $3.15 ´ 400,000 units sold = $1,200,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources, intangible assets, and goodwill. Topic: 08-25 Acquisition and Depletion of Natural Resources

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

152. In 20X5, Barton Iron Ore Co purchased a mine for $200 million ($30 million was applicable to the land). An independent evaluation estimated the mine's iron ore reserves at 7.5 million tons. In 20X5, Barton Co extracted 0.9 million tons. The company's depletion expense for 20X5 is: A. $24 million B. $18.6 million C. $20.4 million D. 12.8 million ($200m - $30m)/7.5m ´ 0.9m tons = $20.4m.

153. Depletion is recorded for which of the following? A. Uncollectible trade receivables. B. Natural resources. C. Intangible assets. D. Land and buildings.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

154. The Orser Mining Company acquired a gold mine for $8,000,000. It is estimated that 40,000 ounces of gold can be extracted from the mine. In the first year of operations, 15,000 ounces of gold were extracted. The Orser Mining Company would recognize: A. an increase in profit of $3,000,000. B. depreciation expense of $3,000,000. C. cost of goods sold of $3,000,000. D. depletion expense of $3,000,000. Calculation: (15,000/40,000) ´ $8,000,000 = $3,000,000.

155. The amortization of finite life intangibles is recorded as: A. a debit to cost of goods sold and a credit to accumulated amortization. B. a credit to accumulated amortization and a debit to the asset account. C. a credit to accumulated amortization and a debit to amortization expense. D. a debit to accumulated amortization and a credit to amortization expense.

156. All of the following are examples of intangible assets except: A. franchises. B. copyrights. C. research costs. D. trademarks.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 08-07 Explain the impact on cash flows of the acquisition, use, and disposal of long-lived assets. Topic: 08-26 Acquisition and Amortization of Intangible Assets

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

157. Which of the following statements is true with respect to intangible assets with indefinite lives? A. They should be amortized over a period of 40 years. B. They should be evaluated each year to determine if there has been any impairment in their value. C. They should be expensed to income in the year they are acquired. D. They are not amortized or written down but remain on the company's balance sheet at their original cost.

158. On January 1, 20X3, Enid Corporation purchased a patent from another company for $190,000. The estimated useful life of the patent is 10 years, and its remaining legal life is 15 years. The amortization expense for 20X3 is: A. $19,000. B. $12,667. C. $85,000. D. $68,000. Calculation: ($190,000 ÷ 10) = $19,000.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

159. Which of the following is an example of an intangible with an indefinite life? A. A copyright on a book of poetry. B. The goodwill value resulting from a business combination. C. A patent on a new invention. D. The research costs to develop a new drug.

160. All the following statements are true, except: A. Copyrights extend for the life of the creator plus 10 years. B. A copyright is amortized over its useful life. C. A copyright gives the owner the exclusive right to reproduce and sell an artistic or published work. D. The cost of a copyright consists of the cost of acquiring and defending it.

161. Intangible assets A. must be reported under the heading Property, Plant, and Equipment. B. are not reported on the statement of financial position because they lack physical substance. C. are reported separately from Property, Plant, and Equipment. D. are reported under current assets.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

162. On the statement of cash flows, cash flows from the purchase and sale of long-lived assets are shown in which section? A. Operating activities. B. Investing activities. C. Financing activities. D. They are not reported on the statement of cash flows.

163. All the following are examples of intangible assets except: A. franchises. B. copyrights. C. research costs. D. trademarks.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Short Answer Questions 164. The following information is available for C Co. and P Co:

C Co. Net fixed assets (beginning of year) Net fixed assets (end of year) Net sales for the year Net income for the year

P Co. $3,743

$6,261

3,669 18,813 3,533

7,318 22,348 1,993

Compute the fixed asset turnover ratio for the year for both C Co. and P Co. C Co. is 5.08 ($18,813/[$3,743 + $3,669]/2); P Co. is 3.29 ($22,348/[$6,261 + $7,318]/2)

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 08-01 Define, classify, and explain the nature of long-lived assets, and interpret the fixed asset turnover ratio. Topic: 08-01 Acquisition and Maintenance of Property, Plant, and Equipment

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

165. On January 1, 20X1, Reagan Company purchased a machine. The price quoted by the seller was $10,000 less 2% if paid within 15 days of the invoice date. Paid with cash were: transportation, $300; installation, $600; and sales tax, $200. Give the entry to record the acquisition assuming the discount was taken. Please review the following information:

Machinery* 10,900 Cash 10,900

*Computations:

Invoice less cash discount ($10,000 × 98%) $9,800 Transportation 300 Installation 600 Sales tax 200 Total $10,900

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property, plant, and equipment. Topic: 08-03 Measuring and Recording Acquisition Cost

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

166. Rebuild Inc. purchased a plant and the land on which the plant was located for a total of $300,000 cash. The separate market values of the plant and land were not known, so Rebuild hired an independent appraiser who gave the following estimated market values: plant, $220,000; land, $110,000. Complete the entry to record the acquisition (show computation). Please review the following information:

Plant 200,000 Land 100,000 Cash 300,000

Plant: $300,000 ´ $220,000/($220,000 + $110,000) = $200,000 Land: $300,000 ´ $110,000/($220,000 + $110,000) = $100,000

167. Raco Inc. purchased two used machines together to get a lower total cash price of $90,000. The machines were different, although of the same general type. They were designated as Machines A and B. New machines of the same type could be purchased as follows: Machine A, $25,000; Machine B, $75,000. Prepare the journal entry to record the purchase and show your computations. Please review the following information:

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Machine A Machine B Cash

22,500 67,500 90,000

Computations:

A. B. Total

Amount $25,000 75,000 $100,000

Ratio 25% 75% 100%

Allocated Lump-Sum Cost Computation Allocated Cost $90,000 × 25% $22,500 90,000 × 25% 67,500 $90,000

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

168. Tiny feet manufactures baby shoes. The company made a lump sum purchase of a plant, including the land and some fixtures, for cash of $160,000. The tax assessments for the past year reflected the following: Land, $22,500; Plant, $58,500; and Fixtures, $9,000. Prepare the journal entry to record the acquisition: Please review the following information:

Land [$160,000 × ($22,500/$90,000)] Plant[$160,000 × ($58,500/$90,000)] Fixtures [$160,000 × ($9,000/$90,000)] Cash

40,000 104,000 16,000 160,000

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

169. Laforge Cement Company bought a piece of land with a building on it for a total of $4,400,000. They obtained two appraisals to estimate the fair values of the land and building.

Land Building

Appraisal 1 $1,200,000 $3,600,000

Appraisal 2 $1,000,000 $4,000,000

Required: 1. If management's objectives are to minimize the amount of income tax they pay, which of the two appraisals should they use to allocate the purchase price? Explain your answer. 2. Based on your answer in part a calculate the amount to be allocated to the Land and the Building account. 3. Under what circumstances might management wish to use the other appraisal value? 1. If they want to minimize taxable income and hence taxes payable, they want the maximum amount allocated to the building, which is deductible (over time through capital cost allowance) for tax purposes. Therefore, they would select the second appraisal Land $1,000,000 and Building $4,000,000. 2. Total appraised value = $5,000,000, Allocated to Land: 1,000,000/5,000,000 = 20% ´ 4,400,000 = $880,000 Allocated to Building: 4,000,000/5,000,000 = 80% ´ 4,400,000 = $3,520,000 3. If management's objectives were to maximize income, in order to increase bonuses or share price, they would want the maximum amount allocated to Land, because that amount would never be expensed as land is not amortized. So, they would select the first appraisal that allocates 25% of the purchase price to Land.

Accessibility: Keyboard Navigation Blooms: Analyze Blooms: Apply Difficulty: Medium Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property, plant, and equipment. Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Topic: 08-04 Various Acquisition Methods Topic: 08-19 Managers' Selection among Accounting Alternatives

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

170. In 20X3, WD Company reported the cost of its theme parks, resorts, and other assets at $14,037 million and the accumulated depreciation at $5,382 million. In that same year, "Toys 4 U" reported $5,610 million in operating assets and accumulated depreciation on them of $1,398 million. 1. Estimate the approximate remaining life of the assets for WD Company and "Toys 4 U". 2. Which company appears to have newer assets with longer remaining lives? (1) a. 62% ($14,037 - $5,382)/$14,037; b. 75% ($5,610 - $1,398)/$5,610; (2) "Toys 4 U" appears to have "newer" assets than WD Company because 75% of their assets' value remains in book value while "Toys 4 U" has 62% in remaining book value.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

171. Chamber Company purchased a truck on January 1, 20X1, at a cash cost of $10,600. The estimated residual value was $400 and the estimated useful life 4 years. The company uses straight-line depreciation computed monthly. On July 1, 20X4, the company sold the truck for $1,700 cash. A. What was the depreciation expense amount per month? B. What was the amount of accumulated depreciation at July 1, 20X4? C. Give the required journal entries on the date of disposal, July 1, 20X4. (Assume no 20X4 depreciation had yet been recorded). A. ($10,000 - 400)/48 - $212.50 per month B. 212.50 ´ 42 months = $8,925 C. Depreciation expense (212.50 × 6) Accumulated depreciation

1,275

Cash Accumulated depreciation Trucks Gain on Disposal

1,700 8,925

1,275

10,600 25

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

172. Sutter Company purchased a machine on January 1, 20X1, for $16,000. The machine has an estimated useful life of 5 years and a $1,000 residual value. It is now December 31, 20X2, and Sutter is in the process of preparing financial statements. Complete the following schedule assuming declining-balance method of depreciation with a 150% acceleration rate.

Date

Depreciation Expense (for the year)

Book Value (end of the year)

12/31/20X1 12/31/20X2

Please review the following information:

Date 12/31/20X1 12/31/20X2

Depreciation Expense (for the year) $4,800 $3,360

rate = 1/5 ´ 1.5 = 30% 20X1 $16,000 ´ 30% = $4,800 20X1 book value $11,200 20X2 ($16,000 - $4,800) ´ 30% = $3,360 20X2 book value $16,000 - ($4,800 + $3,360) = $7,840

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Book Value (end of the year) $11,200 $7,840

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

173. The financial statements of Betty Company contained the following errors:

Item Depreciation expense on office equipment

December 31, 20X1 $500 understated

December 31, 20X2 $600 overstated

Respond to each of the following (disregard income taxes): A. Profit for 20X1, was understated or overstated (circle one). B. Total combined profit for the two-year period ended December 31, 20X2, was overstated or understated (circle one). A. Overstated; B. Understated

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Topic: 08-13 Alternative Depreciation Methods

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

174. On January 1, 20X1, Stern Company (a calendar year corporation) purchased a heavyduty machine having an invoice price of $13,000 plus transportation and installation costs of $3,000. The machine is estimated to have a 4-year useful life and a $1,000 residual value. Assuming the company uses the declining-balance method depreciation and a 150% acceleration rate, complete the following schedule (round to the nearest dollar).

Date

Depreciation Expense (for the year)

Book Value (at the end of the year)

12/31/20X1 12/31/20X2 12/31/20X3 12/31/20X4

Please review the following information:

Date 12/31/20X1 12/31/20X2 12/31/20X3 12/31/20X4

Depreciation Expense (for the year) 0.375* × $16,000 = $6,000 0.375 × 10,000 = 3,750 0.375 × 6,250 = 2,344 0.375 × 3,906 = 2,906**

Book Value (at the end of the year) $16,000 - 6,000 = 10,000 16,000 - 9,750 = 6,250 16,000 - 12,094 = 3,096 16,000 - 15,000 = 1,000

* straight line rate: 1/4 = 0.25 Declining-balance rate: 0.25 ´ 1.5 =0.375 **Even though $3,609 ´ 0.375 = $1,465, the depreciation expense the last year (the fourth year) is the amount necessary to leave book value equal to the residual value of $1,000

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

175. Tweed Feed & Seed purchased a new machine on January 1, 20X1:

Cost when acquired Estimated residual value Estimated useful life

$26,000 2,000 10 years

Accumulated depreciation at the end of year 5 (assume straight-line depreciation) $12,000 It is now the beginning of year 6 and the management re-evaluated the estimates related to the machine. Compute the depreciation expense for year 6 under each of the following independent cases:

Case A B C

Event The estimated total useful life is changed to 15 years The residual value is changed to $1,000; useful life unchanged The estimated total useful life is changed to 7 years and the residual value is changed to $3,000.

Depreciation Expense

CASE A: (26,000 - 12,000 - 2,000) ÷ (15 years - 5 years) = $1,200 Depreciation expense CASE B: (26,000 - 12,000 - 1,000) ÷ (10 years - 5 years) = $2,600 Depreciation expense CASE C: (26,000 - 12,000 - 3,000) ÷ (7 years - 5 years) = $5,500 Depreciation expense

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

176. Duval Company acquired a machine on January 1, 20X1 that cost $2,700 and had an estimated residual value of $200. Complete the following schedule using the three methods of depreciation: A.) straight-line, B.) units-of-production, C.) declining-balance at 150% acceleration rate.

Method

Estimated Useful Life

A. Straight Line B. Units of Production

5 years 10,000 units (total) 1,000 units (20X1's actual) 1,200 units (20X2's actual) 5 years

C. Declining Balance

Depreciation Expense for 20X2

Accumulated Depreciation 12/31/20X2

Depreciation Expense for 20X2 $500

Accumulated Depreciation 12/31/20X2 $1,000

$300

$550

$567

$1,377

Please review the following information:

Method A. Straight Line B. Units of Production C. Declining Balance

Estimated Useful Life $,2500/5 $500 × 2 years $2,500/10,000 $.25 × 1,200 (.25 × 1,000) + (.25 × 1,200) 5 yrs = 20% rate × 150% = 30% Yr 1: $2,700 × 30% = $810 Yr 2: ($2,700 - $810) × 30% = $810 + $567

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

177. On January 1, 20X2, Walton Corporation made a basket purchase of land, a building, and furniture and fixtures. The total purchase price was $313,000. Walton also paid $3,000 for title fees and $4,000 in legal fees related to the purchase. Appraised values at the time of the purchase were: land $70,000; building, $227,500; and furniture and fixtures, $52,500. Required: 1. Make the journal entry to record the purchase of the assets, with cost based on appraised values. 2. The building had an estimated useful life of 20 years and residual value of $30,000. Make the journal entry to record depreciation for 20X2 using the declining-balance method and a 150% acceleration rate. 3. The furniture and fixtures are expected to have useful lives of 5 years and no residual value. What is the amount of depreciation on the furniture and fixtures for 20X2, assuming that Walton uses the straight-line method of depreciation for such assets? 4. Based on the information in part 3, what is the book value of the furniture and fixtures at the end of 20X2? 5. Under IFRS, would Walton be able to use the declining-balance method for the building and the straight-line method for furniture and fixtures? Discuss briefly. 1. Land Building Furniture and Fixtures Cash

64,000 208,000 48,000 320,000

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Computations: Total acquisition costs: $313,000 + $3,000 + $4,000 = $320,000 Total appraised value: $70,000 + $52,500 + $227,500 = $350,000 Land: ($70,000 ´ $320,000)/$350,000 = $64,000 Building: ($227,500 ´ $320,000)/$350,000 = $208,000 Furniture and Fixtures: ($52,500 ´ $320,000)/$350,000 = $48,000 2. Depreciation Expense Accumulated Depreciation Building

15,600 15,600

$208,000 ´ 1/20 ´ 150% = $15,600 3. $48,000 ÷ 5 years = $9,600 4. $48,000 - $9,600 = $38,400 5. IFRS allow a company to use different depreciation methods for different assets or groups of assets. Walton would be able to use the declining-balance for buildings and straight-line depreciation for furniture and fixtures.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property, plant, and equipment. Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Topic: 08-04 Various Acquisition Methods Topic: 08-13 Alternative Depreciation Methods

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

178. Macon Assembly Company purchased a machine on January 2, 20X3, by paying cash of $85,000. The machine has an estimated useful life of five years (or the production of 200,000 units) and an estimated residual value of $5,000. Required: 1. Determine depreciation expense (to the nearest dollar) for each year of the machine's useful life under (a). straight-line depreciation; and (b). the declining-balance method with a 200% acceleration rate. 2. What is the book value of the machine after three years with the declining-balance method and a 200% acceleration rate? 3. What is the book value of the machinery after three years with straight-line depreciation. 4. If the machine was used to produce and sell 48,000 units in 20X3, what would the depreciation expense be under the units of production method? 1. a. Straight-line depreciation for years 1 through 5 = ($85,000 - $5,000/5 years) = $16,000 b. Declining balance sheet method - 200% acceleration rate

Year 1 2 3 4 5

Depreciation expense $85,000 × 1/5 × 200% = $34,000 $51,000 × 1/5 × 200% = $20,400 $30,600 × 1/5 × 200% = $12,240 $18,360 × 1/5 × 200% = $7,344 $80,000 - $73,984 accumulated depreciation. = $6,016*

8-78

Book Value end of the year $85,000 51,000 30,600 18,360 11,016 5,000

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

2. $85,000 - 34,000 - 20,400 - 12,240 = 18,360 3. $85,000 - (16,000 ´ 3) = 37,000 4. ($85,000 - 5,000)/200,000 = $.40/unit $.40 ´ 48,000 = $19,200

179. On September 7, 20X2, Belverd Corporation purchased a building and land at a total acquisition cost of $500,000. An appraiser estimated that 80% of the purchase price should be assigned to the building and the remainder to the land. Required: 1. Make the journal entry for the acquisition of the land and building. 2. Make the journal entry to record depreciation of the building for 20X2. Belverd takes a full month of depreciation for assets acquired in the first half of the month and uses the straightline method. The building has a residual value of $40,000 and an estimated useful life of 20 years. 3. Based on the information in part 2, what will the book value of the building be at the end of 20X3? 4. Why was it important for Belverd to separate the cost of the land and the cost of the building? 1. Building Land Cash

400,000 100,000 500,000

2. Depreciation Expense Accumulated Depreciation Building

6,000 6,000

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Computation: ($400,000 - 40,000)/20 years = $18,000/year $18,000/yr ´ 4 months/12 months = $6,000 3. Book value = $400,000 - 24,000 accumulated depreciation = $376,000 4. Belverd separated the cost of the building and the cost of the land when it made the original entry to record the acquisition because depreciation must be recorded for the building and not for the land. Recording the assets in separate accounts simplifies the process of properly recording depreciation.

180. Hilman Company purchased a truck on January 1, 20X1, at a cost of $34,000. The company estimated that the truck would have a useful life of four years and a residual value of $4,000. Required: 1. Complete the following table:

Year Depreciation Straightline method 20X1 20X2 20X3 20X4

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Depreciation Declining balance method 200% acceleration rate

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

2. Which of the two methods in part 1 would result in: a. Lower profit in 20X1? ___________ b. Lower profit in 20X4? ___________ Please review the following information:

Straight-line method 20X1 20X2 20X3 20X4

$7,500 $7,500 $7,500 $7,500

Declining balance method 200% acceleration rate $17,000 $8,500 $4,250 $250

Straight-line: ($34,000 - 4,000)/4 years = $7,500 Declining-balance: 20X1 1/4 ´ 200% ´ $34,000 = $17,000 20X2 1/4 ´ 200% ´ ($34,000 - $17,000) = $8,500 20X3 1/4 ´ 200% ´ ($34,000 - $25,500) = $4,250 20X4 Book value $4,250 - $4,000 target book value = $250 2. Lower profit: (a) 20X1 Declining-balance 200% acceleration rate; (b) 20X4 Straight-line

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

181. FAL Corporation purchased a robot to be used in manufacturing. The purchase was made at the beginning of 20X1 by paying cash of $500,000. The robot has an estimated residual value of $20,000 and an expected useful life of ten years. At the beginning of 20X3, FAL concluded that the total useful life of the robot will be eight years rather than ten, and that the residual value will be zero. FAL uses the straight-line method for depreciation. Required: 1. Make the journal entry to record depreciation on the robot for 20X2. 2. Make the journal entry to record depreciation on the robot for 20X3, including the effect of the changes in estimates. 3. Describe how a business should account for a change in the estimated useful life and/or residual value of a depreciable asset. 1. Depreciation Expense Accumulated Depreciation

48,000 48,000

Computations: ($500,000 - $20,000)/10 years = $48,000/year 2. Depreciation Expense Accumulated Depreciation

67,333 67,333

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Computations: $500,000 - $48,000 amortization/year ´ 2 years = $404,000 remaining amortizable value $404,000/6 year remaining useful life = $67,333 3. A change in estimate of residual value or useful life requires the company to calculate a new annual depreciation amount. The change in estimates affects the amount of depreciation for current and future years. There is no restatement of financial statements for prior years.

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

182. Here are selected 20X3 transactions of Avery Corporation.

Jan. 1

June 30

Dec. 31

Retired a piece of machinery that had been purchased ten years earlier on January 1. The machine cost $62,000 and had a useful life of 10 years with no residual value. Sold a computer that was purchased on January 1, 20X1. The computer cost $39,000 and had a useful of 3 years with no residual value. The computer was sold for $5,000 cash. Sold a delivery truck for $9,000 cash. The truck cost $25,000 when it was purchased on January 1, 20X0, and was depreciated based on a 5-year useful life with a $3,000 residual value.

Avery Corporation uses straight-line depreciation. Required: Prepare all entries required on the above dates, including entries to update depreciation on assets disposed of, where applicable. Please review the following information:

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Date Jan. 1

June 30

Dec. 31

Account Titles and Explanation Accumulated Depreciation Machinery Machinery Depreciation Expense Accumulated Depreciation Computer ($39,000/3 years × 6/12) Cash Accumulated Depreciation -Computer ($39,000 × 2/3 = $26,000; $26,000 + $6,500) Loss on Disposal $5,000 - ($39,000 $32,500) Computer Depreciation Expense Accumulated Depreciation - Truck ($25,000 - $3,000)/5 years Cash Accumulated Depreciation - Truck ($25,000 - $3,000) × 4/5 Truck Gain on Disposal

Debit

Credit 62,000 62,000 6,500 6,500

5,000 32,500

1,500 39,000 4,400 4,400

9,000 17,600

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Learning Objective: 08-05 Analyze the disposal of property, plant, and equipment. Topic: 08-13 Alternative Depreciation Methods Topic: 08-23 Disposal of Property, Plant, and Equipment

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25,000 1,600

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

183. Give the required adjusting entry at December 31, 20X6, the end of the annual accounting period for the three items below. If no entry is required, explain why. A. Web Company acquired a patent that cost $4,260 on January 1, 20X6. The patent was registered on January 1, 20X1. The legal life of a patent is 17 years from registration. Web expects to use the patent the remaining legal life. B. Web Company acquired a gravel pit on January 1, 20X6, that cost $24,000. The company estimates that 30,000 tons of gravel can be extracted economically. During 20X6 4,000 tons were extracted and sold. C. On January 1, 20X6, Web Company acquired a dump truck that cost $6,000 to use hauling gravel. The company estimated a residual value of 10% of cost and a useful life 4 years. The company uses straight-line depreciation. Please review the following information:

Patent amortization expense Patents $4,260/(17 - 5) years = $355 Depletion expense Gravel pit $.80 × 4,000 tons = $3,200 Depreciation expense Accumulated depreciation $6,000 × .90 = $5,400 to be depreciated $5,400/4 = $1,350

355 355 3,200 3,200 1,350

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 08-03 Apply various depreciation methods as assets are held and used over time. Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources, intangible assets, and goodwill. Topic: 08-13 Alternative Depreciation Methods Topic: 08-25 Acquisition and Depletion of Natural Resources Topic: 08-26 Acquisition and Amortization of Intangible Assets

8-86

1,350

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

184. For each of the following three independent situations determine the gain or loss on the sale or disposal of the asset. Prepare the journal entry required at the time of sale or disposal. Assume that all assets are depreciated using the straight-line method and in every case, a yearend of December 31. 1. Equipment purchased July 1, 20X4, for $75,000 was sold for $9,500 on June 30, 20X9. At the time of purchase, it was estimated to have a $5,000 residual value and a five-year useful life. Assume that a half-year depreciation is taken in the year the equipment was acquired and in the year it was sold. 2. Calibrating equipment was purchased on July 10, 20X8, for $120,000. At the time, it was estimated to have a six-year useful life and no residual value. On September 30, 20X9, there was a fire in the plant, and the equipment suffered water damage and is beyond repair. The company received $50,000 from the insurance company for the equipment. Assume depreciation is applied monthly. 3. Office furniture was purchased on February 11, 20X0 for $25,000 and was estimated to have a useful life of ten years and a salvage value of $2,500. On August 1, 20X7, the company moved to new offices and donated the old furniture to charity. Assume that a halfyear depreciation is taken in the year the furniture was acquired and in the year it was donated. 1. ($75,000 - $5,000)/5 = $14,000 depreciation per year. 4 full years (20X5-X6-X7-X8) and 2 half-years (20X4 & 20X9) = 5 full years. NBV = $75,000 - (5 ´ $14,000) = $5,000, which equals the residual value. Gain: $9,500 $5,000 = $4,500

Depreciation Expense Accumulated Depreciation

7,000

Cash Accumulated Depreciation Equipment Gain on disposal

9,500 70,000

7,000

75,000 4,500

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

2. $120,000/6 = $20,000 depreciation per year, ½ year in 20X8 and 9 months in 20X9 = 20,000 ´ 15/12 = $25,000 of depreciation taken, NBV = 120,000 - 25,000 = $95,000 Proceeds from insurance 50,000 - 95,000 = $45,000 loss

Depreciation Expense Accumulated Depreciation

15,000

Cash Accumulated Depreciation Loss on recording equipment Calibrating Equipment

50,000 25,000 45,000

15,000

120,000

3. ($25,000 - $2,500)/10 = $2,250 depreciation expense a year. Two half-years in 20X0 and 20X7, 6 years 20X1 to 20X6 = 7 yrs depreciation (7 ´ 2,250) = $15,750 NBV = 25,000 - 15,750 = $9,250

Depreciation Expense Accumulated Depreciation

1,125

Accumulated Depreciation Loss on office furniture donated Office furniture

15,750 9,250

1,125

25,000

8-88

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 08-05 Analyze the disposal of property, plant, and equipment. Topic: 08-23 Disposal of Property, Plant, and Equipment

185. Diggidy Mining Company purchased a site containing a mineral deposit in 2019. The purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable ore. Weaver constructed a building at the site, at a cost of $500,000, to be used while the ore is being extracted. When the ore reserves are gone, the building will have no further value. Required: 1. Explain the purpose for recording depletion on natural resources. 2. Calculate Diggidy's depletion rate per ton of ore for this deposit. 3. Make the journal entry to record depletion for the year 2019, when Diggidy mined and sold 150,000 tons of ore. 4. Make the journal entry to record depreciation on the building for 20X3. Diggidy calculates depreciation on the building using the units of production method based on the amount of ore extracted (150,000 tons in 20193). 1. The purpose of recording depletion is to match the cost of a natural resource with revenues earned from extracting and selling the resource. 2. $820,000/400,000 tons = $2.05/ton 3. 2.05*150,000

Depletion Expense Mineral Deposit (or Accumulated Depletion)

307,500 307,500

4. 150,000/400,000*500,000

Amortization Expense Accumulated Depreciation, Building

187,500 187,500

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

186. Listed below are various methods of allocating the cost of certain capital assets over their useful lives, each followed by a descriptive statement. Match the methods to the statements by placing the appropriate letter in the space provided. METHODS A. Capitalized and depreciated/amortized/depleted B. Capitalized C. Evaluated for impairment D. Expensed E. None of these methods

1.Purchased patent 2.Cost to hire architect for designing a building it plans to construct 3.Advertising costs 4.Intangible assets with indefinite live 5.Legal costs incurred to defend a copyright from infringement 6.Research costs incurred internally 7.Cost of timberland 8.Five-acre parcel of land where a firm's headquarters is located 9.Purchased drilling equipment 10.Goodwill acquired in a business combination 11.Interest on self-constructed assets 12.Development costs for a proven new product

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Please review the following information:

A A D C A D A E A C A B

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 08-06 Apply measurement and reporting concepts for natural resources, intangible assets, and goodwill. Learning Objective: 08-07 Explain the impact on cash flows of the acquisition, use, and disposal of long-lived assets. Topic: 08-25 Acquisition and Depletion of Natural Resources Topic: 08-26 Acquisition and Amortization of Intangible Assets

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

187. On January 2, 20X4, Daintry Company purchased a patent for $380,000 from an inventor who had developed a new manufacturing process. At the time of the purchase, the patent had a remaining legal life of 12 years, but Daintry estimated the useful life to the company to be only 10 years. Required: 1. Prepare the journal entry to record Daintry's purchase of the patent. 2. Prepare the journal entry to record amortization of the patent for 20X4, assuming that no contra account is used. 3. At the start of 20X7, after amortization had been recorded for three years, Daintry concluded that the total useful life of the patent would be 7 years, rather than 10. Record Daintry's amortization expense for 20X7. Please review the following information:

1. 2. 3.

Patent Cash Amortization Expense Patent Amortization Expense Patent

380,000 380,000 38,000 38,000 66,500 66,500

Computations: [$380,000 - (38,000 ´ 3)/4 years remaining life = $66,500 amortization/year

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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

188. Franklin's Fresh Pies has been in business 8 years with 4 stores in the Halifax area. Their local reputation for making savory vegan pies is well recognized. A national food distributor has offered to purchase the company. Franklin's Fresh Pies has $1.2 million of assets on their books but those assets have $1.5 million in value at fair market value and $.3 million of liabilities. If the distributor offers to buy Pied Piper for $3.5 million. r. How much goodwill, if any, should be recorded? $2.3 million ($3.5 million minus {$1.5 million minus $.3 million})

189. A company purchased equipment for $800,000 and has depreciated it for the past 5 years. Its original life was estimated to be 10 years with a $200,000 residual value. However, the equipment's utility to the company has since declined and they expect it to generate a net cash flow over the remaining years of $200,000 from its operation. If the asset has been impaired, how much will be recorded as a loss to impairment in the current year? $300,000 (Remaining book value $500,000 minus $200,000 expected cash flow)

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Topic: 08-22 Measuring Asset Impairment

8-93

Chapter 09 - Reporting and Interpreting Current Liabilities

Chapter 09 Reporting and Interpreting Current Liabilities

True / False Questions 1. A current liability must be paid out of current earnings. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

2. If any portion of outstanding debt is to be paid in the next year, the entire amount should be classified as a current liability. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

3. Current liabilities have a due date within one year. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

9-1

Chapter 09 - Reporting and Interpreting Current Liabilities

4. A company whose current liabilities exceed its current assets may have a liquidity problem. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

5. Property tax payable is classified as a long-term liability because it is related to property, a noncurrent asset. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-03 Accounts Payable

6. If a company's fiscal year is the same as the year used for property tax purposes, there should be no prepaid property tax on its year-end financial statements but there may be a property tax liability. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

7. Interest expense is reported under Other Expenses in the statement of earnings. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

9-2

Chapter 09 - Reporting and Interpreting Current Liabilities

8. Deferred revenues is classified as Other Revenues on the statement of earnings. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-03 Accounts Payable

9. Payroll liabilities include the employee's share of CPP contributions and EI premiums. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

10. The quick ratio is the dollar difference between total assets and total liabilities. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-01 Liabilities Defined and Classified

11. Analysts use the quick ratio to assess the profitability of a company. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-01 Liabilities Defined and Classified

9-3

Chapter 09 - Reporting and Interpreting Current Liabilities

12. A quick ratio that is high when compared to an industry average might mean the company may have excessive inventory levels or slow-moving inventory items. FALSE

13. A company that sells primarily on a cash basis could support a lower quick ratio because their cash inflow is faster than a company selling on credit. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-01 Liabilities Defined and Classified

14. Genetiks Co, a biotechnology company, reported current assets of $1,326.5 million and current liabilities of $484.1 million in 20X3 and in 20X2, current assets of $1,242.0 million and $291.3 million of current liabilities. Therefore, working capital for G Co. increased from 20X2 to 20X3. FALSE

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Compute and interpret the quick ratio. Topic: 09-14 Working Capital Management

15. Liabilities represent a legal obligation to pay at some point in the future. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

9-4

Chapter 09 - Reporting and Interpreting Current Liabilities

16. A liability, to be reported on the statement of financial position, must have a fixed, known amount to be paid in the future. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-02 Current Liabilities

17. The trade payables turnover ratio can indicate if a company is experiencing cash flow problems. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

18. The "trade payables" account should generally be used only for trade payables (obligations owed to suppliers in the normal course of business) which relate to the purchase of goods and services. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

19. An accrued expense arises because an expense item has been prepaid, but the related expense has not been incurred yet. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-06 Taxes Other than Income Taxes

9-5

Chapter 09 - Reporting and Interpreting Current Liabilities

20. The Canada Pension Plan contribution is a matching contribution with a portion paid by both the employer and the employee. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

21. The trade payables turnover ratio shows how quickly management is paying its trade creditors and is considered to be a measure of liquidity. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

22. Interest expense on a note payable is only recorded at maturity. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

23. Most notes payable bear interest. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

9-6

Chapter 09 - Reporting and Interpreting Current Liabilities

24. Interest on a note payable is calculated as: Principal ´ Interest Rate. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

25. Current liabilities are short-term obligations that will be paid within the current operating cycle of the business or within two years of the statement of financial position date, whichever is longer. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

26. The amount of salary expense that a company records for a pay period will usually be less than the amount of salary payable that it records. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

27. If a company intends to refinance a liability that is due within one year, that liability should not be classified as a current liability. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

9-7

Chapter 09 - Reporting and Interpreting Current Liabilities

28. The trade payables turnover ratio tests how quickly our credit customers pay their bills. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

29. The trade payables turnover ratio can be manipulated by management through paying off more of their vendors at the end of the year, even though they have been paying late all year, so their ratio would look acceptable. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

30. A low trade payables turnover ratio caused by an aggressive cash management strategy, while the quick ratio is adequate, would be perceived by analysts as a weakness. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

31. With an interest-bearing note, the amount of cash received upon issue of the note generally exceeds the note's face value. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

9-8

Chapter 09 - Reporting and Interpreting Current Liabilities

32. A note payable must always be paid before an account payable. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

33. When the current assets of a company such as trade receivables or inventory increase during the year, the increase provides additional cash inflow from operating activities. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-06 Compute and interpret the quick ratio. Topic: 09-14 Working Capital Management

34. Notes payable usually require the borrower to pay interest. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

35. Notes payable are sometimes used instead of trade payables. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

9-9

Chapter 09 - Reporting and Interpreting Current Liabilities

36. Changes in trade payables and accrued liabilities affect cash flows from operating activities. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-06 Compute and interpret the quick ratio. Topic: 09-14 Working Capital Management

37. In the recognition of revenues and expenses, temporary and permanent differences between the financial statements and the tax return will result in a Future Income Tax Asset. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-15 Appendix 9A: Deferred Income Tax Assets and Liabilities

38. The balance in the Income Tax Asset account will always reverse over a period of one or more future periods if no new differences are created. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-15 Appendix 9A: Deferred Income Tax Assets and Liabilities

39. All contingent liabilities should be classified as either current or long-term liabilities on the statement of financial position for the current period. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-05 Explain the importance of working capital and its impact on cash flows. Topic: 09-13 Contingent Liabilities

9-10

Chapter 09 - Reporting and Interpreting Current Liabilities

40. Contingencies are disclosed in a note if it is probable that cash of other assets will be required to settle the obligation, or if the amount of the obligation cannot be measured with sufficient reliability. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 09-05 Explain the importance of working capital and its impact on cash flows. Topic: 09-13 Contingent Liabilities

41. Under IFRS, a distinction is made between provisions and contingencies. Provisions are estimated liabilities that are reported on the statement of financial position whereas contingencies are not recognized as liabilities because of the uncertainty of the amount and timing of future payments. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-04 Report contingent liabilities. Topic: 09-12 Provisions Reported on the Statement of Financial Position

42. A contingent liability that is "probable" and can be "reasonably estimated" must be accrued and reported as a liability. TRUE

9-11

Chapter 09 - Reporting and Interpreting Current Liabilities

43. A commitment is a contractual agreement to enter into a transaction with another party in the future. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 09-05 Explain the importance of working capital and its impact on cash flows. Topic: 09-13 Contingent Liabilities

44. Any contingent liability, regardless of probability of occurrence must be disclosed in a note to the financial statements. FALSE

45. The time value of money refers to the fact that interest can be earned on a sum of money with the passage of time. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-16 Appendix 9B: Present Value Concepts

46. Time value of money is based on the concept that money received today is worth more than money to be received a year from today. TRUE

9-12

Chapter 09 - Reporting and Interpreting Current Liabilities

47. In real life, there is only one correct discount rate. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-16 Appendix 9B: Present Value Concepts

48. In establishing the present value, different discount rates would result in different present values. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-16 Appendix 9B: Present Value Concepts

49. Any future amount can be converted to a present value equivalent. TRUE

50. A reciprocal relationship exists between the "future value of $1" and the "present value of $1." TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-30 Appendix 9E: Future Value Concepts

9-13

Chapter 09 - Reporting and Interpreting Current Liabilities

51. For the future value of a single amount, the compounding period may only be once a year. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-31 Future Value of a Single Amount

52. The future value of $1 is always more than $1, whereas the present value of $1 is always less than $1, assuming positive interest rates TRUE

53. The future value of an annuity is always more than the sum of its payments whereas the present value of an annuity is always less than the sum of its payments. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-32 Future Value of an Annuity

54. The present value of an annuity is a function of the interest (discount) rate and the periodic payment amount. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-32 Future Value of an Annuity

9-14

Chapter 09 - Reporting and Interpreting Current Liabilities

55. An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount over the payment amount of the prior year. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-32 Future Value of an Annuity

Multiple Choice Questions 56. A current liability is a debt that can reasonably be expected to be paid A. within one year. B. between 6 months and 18 months. C. out of currently recognized revenues. D. out of cash currently on hand.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

57. Which of the following is not a typical current liability? A. Sales taxes payable B. Bonds payable C. Deferred revenue D. Income tax payable

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

9-15

Chapter 09 - Reporting and Interpreting Current Liabilities

58. Which of the following most likely would be classified as a current liability? A. Dividends payable B. Bonds payable C. Three-year notes payable D. Mortgage payable

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

59. A decrease in the current ratio is A. viewed positively by creditors. B. viewed negatively by creditors. C. Creditors don't care about the company's current ratio. D. always accompanied by an increase in current assets.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

60. Purchase of inventory for cash will: A. increase the current ratio. B. decrease the current ratio. C. increase the quick ratio. D. decrease the quick ratio.

9-16

Chapter 09 - Reporting and Interpreting Current Liabilities

61. A company's quick ratio: A. can never be larger than its current ratio. B. indicates the length of time the company takes to pay its short-term creditors. C. indicates how quickly the company converts its current assets to cash. D. is computed by dividing current assets by current liabilities, excluding accounts payable for inventory purchases.

62. The following is a partial list of account balances from the books of Ellsworth Enterprise at the end of 20X1:

Trade Payables Trade Receivables Accrued Vacation Liability Cash Deferred Revenue Income Taxes Payable Notes Payable (due in 2 years)

$1,200 1,000 900 3,000 500 2,200 600

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Chapter 09 - Reporting and Interpreting Current Liabilities

Based solely upon these balances, what amount of current liabilities should appear on Ellsworth's 20X1 year-end statement of financial position? A. $3,900 B. $4,300 C. $4,800 D. $5,400 Calculation: $1,200 + 900 + 500 + 2,200 = $4,800.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

63. On January 1, 20X3, Osler Limited, a calendar-year company, issued $160,000 of notes payable, of which $40,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 20X3, is A. Current Liabilities, $160,000. B. Long-term Debt, $160,000. C. Current Liabilities, $40,000; Long-term Debt, $120,000. D. Current Liabilities, $120,000; Long-term Debt, $40,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

64. Liquidity ratios measure a company's A. operating cycle. B. revenue-producing ability. C. short-term debt paying ability. D. Long-term debt paying ability.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-01 Liabilities Defined and Classified

9-18

Chapter 09 - Reporting and Interpreting Current Liabilities

65. The following information is available for Lowell Company:

Current Assets Cash Marketable securities Accounts receivable Inventories Prepaid expenses Total current assets

$4,000 75,000 61,000 110,000 30,000 $280,000

Total current liabilities are $80,000. The quick ratio for Lowell is A. 1.75 B. 2.13 C. 3.25 D. 1.3 ($4,000 + $75,000 + 61,000)/$80,000 = 1.75.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-01 Liabilities Defined and Classified

66. Which of the following most likely would be classified as a current liability? A. Bonds payable B. Three-year notes payable C. Mortgage payable D. Dividends payable

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Chapter 09 - Reporting and Interpreting Current Liabilities

67. A customer paid a total of $84,000 for a purchase, including 15% HST. What was the HST amount to the nearest dollar? A. $10,957 B. $12,600 C. $71,400 D. $11,455 Calculation: $84,000 ´ 15/115 = $10957.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

68. A company receives $111, of which $11 is for PST (provincial sales tax). The journal entry to record the sale would include a A. debit to PST Expense for $11. B. credit to PST Payable for $11. C. debit to Sales for $111. D. debit to Cash for $90.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

69. The relationship between current assets and current liabilities is A. useful in evaluating a company's liquidity. B. called the matching principle. C. useful in determining the company's solvency. D. useful in determining profit.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

9-20

Chapter 09 - Reporting and Interpreting Current Liabilities

70. Which of the following method of ordering is normally used to present current liabilities on the statement of financial position? A. In order of their magnitude B. In order of their liquidity (due date) C. In alphabetical order D. In order of reverse liquidity

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

71. Most companies pay current liabilities A. out of current assets. B. by issuing interest-bearing notes payable. C. by issuing shares. D. by creating long-term liabilities.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

72. Failure to record a liability will probably A. have no effect on net earnings. B. result in overstated total liabilities and shareholders' equity. C. result in overstated total assets. D. result in overstated net earnings.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

9-21

Chapter 09 - Reporting and Interpreting Current Liabilities

73. Accounts payable are recorded on the books at their: A. net realizable value B. gross amount C. net present value D. net amount

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

74. Gothic Architects Inc. received its annual property tax bill for $7,800 in January. It is due on February 28th. What is the journal entry that should be made in January? A. Please see the following information:

Property Tax Expense Property Tax Payable

650 650

B. Please see the following information:

Property Tax Expense Property Tax Payable

7,800 7,800

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Chapter 09 - Reporting and Interpreting Current Liabilities

C. Please see the following information:

Property Tax Expense Prepaid Property Tax Property Tax Payable

650 7,150 7,800

D. Please see the following information:

Prepaid Property Tax Property Tax Payable

7,800 7,800

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

9-23

Chapter 09 - Reporting and Interpreting Current Liabilities

75. Superior Corp provides the following information for 2018 and 2019

2018 Current assets Accounts payable Other current liabilities Non-current liabilities Sales Cost of sales

2019 $23,000 9,000 5,000

$27,000 10,000 4,000

50,000

62,000

125,000 75,000

135,000 79,600

Use 365 days and round your intermediate answer to 2 decimal places. Superior's average days to pay payables for 2019 is closest to A. 47.2 days B. 43.6 days C. 48 days D. 46.2 $79,600/$9,000 + $10,000/2 = 8.38; 365/8.38 = 43.6.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

9-24

Chapter 09 - Reporting and Interpreting Current Liabilities

76. GST (goods and services tax) collected by a retailer is recorded by A. crediting GST Revenue. B. debiting GST Expense. C. crediting GST Payable. D. debiting GST Payable.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

77. GST (goods and services tax) collected by a retailer are expenses A. of the retailer. B. of the customers. C. of the government. D. that are not recognized by the retailer until they are submitted to the government.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

78. Emerald Jewelers is a retail store operating in Ontario, where the GST is 5% and the PST is 8%. For the month of June, Emerald sold $45,000 worth of jewelry to customers, 60% of which were cash sales and the balance paid by credit cards. Credit card fees are 2.5%. Based on this information, what is the total debit to Accounts Receivable for the month of June? A. $50,850 B. $50,342 C. $44,550 D. $45,000 $45,000 ´ 1.13 = $50,850. Note: Credit card companies normally pay out monthly or semi-monthly.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

9-25

Chapter 09 - Reporting and Interpreting Current Liabilities

79. A cash register tape shows cash sales of $2,000 and provincial sales tax (PST) of $120. The journal entry to record this information is A. Please see the following information:

Cash Sales

2,000 2,000

B. Please see the following information:

Cash PST payable Sales

2,120 120 2,000

C. Please see the following information:

Cash PST receivable Sales

2,000 120 2,120

D. Please see the following information:

Cash Sales PST Payable

2,120 2,000 120

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Chapter 09 - Reporting and Interpreting Current Liabilities

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

80. An employee receives a bi-weekly gross salary of $2,000. Income tax is $218, CPP is $99, EI is $36, and union dues are $50. What is the amount of the employee's take home pay (net pay) on a bi-weekly basis? A. $1,597 B. $1,732 C. $1,782 D. $2,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

81. Affordable Organics Foods distributes coupons to consumers which may be presented, on or before a stated expiry date, to grocery stores for discounts on certain Affordable Organics products. The stores are reimbursed when they send the coupons to Affordable Organics. In Affordable Organics' experience, only about 50% of these coupons are redeemed. During 2019, Affordable Organics issued two separate series of coupons as follows:

Issued On

Jan 1 2019 Oct 1 2019

Total Value

Coupon Expiry Date

$250,000 $360,000

Jun 30 2019 Mar 31 2020

9-27

Amounts Reimbursed as of Dec 31 2019 $118,000 $150,000

Chapter 09 - Reporting and Interpreting Current Liabilities

Affordable Organics' only journal entries for 2019 recorded debits to coupon expense, and credits to cash of $268,000. Their December 31, 2019 balance sheet should include a provision for unredeemed coupons of: A. $180,000 B. $62,000 C. $30,000 D. $0 Jan coupons expired in June 2019. June coupons $360,000 ´ 50% = $180,000 - already redeemed $150,000 = $30,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

82. Site Company had the following account balances related to payroll at the end of the period:

CPP payable - employees' share Liability for income taxes withheld Salary and wage expense

7,000 20,000 95,000

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Chapter 09 - Reporting and Interpreting Current Liabilities

Without considering any employer payroll taxes, Site would record Salaries Payable for the pay period amounting to which of the following? A. $61,000 B. $68,000 C. $75,000 D. $95,000 Calculation: $95,000 - $20,000 - $7,000 = $68,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

83. How should the amount of federal income tax that is withheld from employees' paychecks by the employer be recorded? A. On the employer's books as a current liability. B. On the employer's books as an asset. C. On the employer's books as revenue. D. It should not be recorded on the employer's books.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

84. The federal government requires which of the following? A. Only the employer to pay CPP contributions. B. Only the employee to pay CPP contributions. C. Both the employee and the employer have the option of paying CPP. D. Both the employer and the employee to pay CPP contributions.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-06 Taxes Other than Income Taxes

9-29

Chapter 09 - Reporting and Interpreting Current Liabilities

85. A Co, a biotechnology company, reported cost of sales of $345.2 million and trade payables of $121.6 million for 20X3. In 20X2, cost of sales was $300.8 million and trade payable was $103.9 million. What was A Co's trade payables turnover ratio in 20X3? A. 2.84 B. 2.86 C. 2.90 D. 3.06 Calculation: $345.2 ÷ [($121.6 + $103.9)/2] = 3.06.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

86. In 20X3, P Co reported a trade payables turnover ratio of 2.49 and C Co reported a turnover ratio of 1.74 for that same year. Which of the following statements is true? A. C Co pays their vendors in a timelier manner than P Co pays their vendors. B. On a comparative basis to cost sales, P Co carries more in average payables than does C Co. C. It is unclear if P Co pays their vendors in a timelier manner than C Co. D. P Co took approximately 147 days while C Co took about 210 days to pay vendors.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

9-30

Chapter 09 - Reporting and Interpreting Current Liabilities

87. In 20X3, Toys 4 U had account payables turnover ratio of 6.08; in 20X2, 5.87; and 5.45 in 20X1. Which of the following statements is true about what the ratios indicate? A. Toys 4 U is taking longer to pay its vendors in 20X3 versus 20X2. B. Toys 4 U is taking less time to pay vendors in 20X3 than it took in both 20X2 and 20X1. C. Toys 4 U has been increasing its average payables at a faster rate than its cost of sales has increased. D. Toys 4 U is taking less time to collect from its customers.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

88. Sales tax collected by a retail store when sales are made is A. miscellaneous revenue for the store. B. a current liability. C. not recorded because it is a tax paid by the customer. D. a non-current liability.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

89. On September 1, Hauser Corp. borrowed $70,000 from the Metro Bank for five months at 9%. Interest is payable at maturity. The entry Hauser must make on December 31, its yearend, assuming no prior accruals is: A. Please see the following information:

Interest Expense Notes Payable

6,300 6,300

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Chapter 09 - Reporting and Interpreting Current Liabilities

B. Please see the following information:

Interest Expense Interest Payable

1,575 1,575

C. Please see the following information:

Interest Expense Interest Payable

2,625 2,625

D. Please see the following information:

Interest Expense Interest Payable

2,100 2,100

Calculation: $70,000 ´ 9% ´ 4/12 = $2100.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

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Chapter 09 - Reporting and Interpreting Current Liabilities

90. A 9% six-month note for $10,000 was recorded on October 1. What journal entry would be recorded at the year end of December 31 if interest is payable at maturity? A. Please see the following information:

Note Payable Interest Payable Interest Expense

900 450 450

B. Please see the following information:

Interest Expense Interest Payable

900 900

C. Please see the following information:

Interest Expense Interest Payable

225 225

D. Please see the following information:

Interest Expense Notes Payable

450 450

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Chapter 09 - Reporting and Interpreting Current Liabilities

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

91. On September 1, Linwell Corp. borrowed $70,000 from the Highland Bank for five months at 9%. Interest is due at maturity. The company's year-end is December 31, at which time any outstanding interest was accrued. The entry to record payment of the note and accrued interest on February 1, the due date, is: A. Please see the following information:

Notes Payable Interest Payable Interest Expense Cash

70,000 2,100 525 72,625

B. Please see the following information:

Notes Payable Cash

72,625 72,625

C. Please see the following information:

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Chapter 09 - Reporting and Interpreting Current Liabilities

Note Payable Interest Payable Cash

70,000 2,625 72,625

D. Please see the following information:

Note Payable Interest Expense Cash

70,000 2,625 72,625

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

92. Failure to make a necessary adjusting entry for accrued interest on a note payable would cause which of the following? A. An understatement of liabilities and shareholders' equity. B. Profit to be overstated and assets to be understated. C. Profit to be understated and liabilities to be understated. D. An overstatement of profit, an understatement of liabilities, and an overstatement of shareholders' equity.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

9-35

Chapter 09 - Reporting and Interpreting Current Liabilities

93. Goodman Company borrowed $100,000 cash on September 1, 20X1, and signed a oneyear, 12%, interest-bearing note payable. What would be the required adjusting entry at the end of the accounting period, December 31, 20X1? A. Please see the following information:

Interest expense Interest payable

4,000 4,000

B. Please see the following information:

Interest expense Interest payable

12,000 12,000

C. Please see the following information:

Notes payable Interest expense Cash

100,000 12,000 112,000

D. Please see the following information:

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Chapter 09 - Reporting and Interpreting Current Liabilities

Interest payable Interest expense

4,000 4,000

Calculation: $100,000 ´ 12% ´ 4/12 = $4,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

94. The interest charged on a $200,000 note payable, at the rate of 6%, on a 3-month note would be A. $12,000 B. $3,000 C. $4,000 D. $1,000 $200,000 ´ 6% ´ 3/12 = $3,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

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Chapter 09 - Reporting and Interpreting Current Liabilities

95. Deferred revenue is another term for which of the following? A. Prepaid expenses B. Sales revenue C. Trade payables D. Unearned revenue

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 09-04 Report contingent liabilities. Topic: 09-11 Deferred Revenues

On July 1, 20X0, Wilson, Inc., borrowed $12,000 from First Bank on a one year, 8% note payable. Interest is payable on December 31, 20X0 and on June 30, 20X1, the due date of the note.

96. The journal entry required on the company's books to record the note payable on July 1, 20X0 would include which of the following? A. A credit to notes payable for $12,000. B. A credit to notes payable for $12,960. C. A debit to cash for $11,040. D. A debit to interest expense for $960.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

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Chapter 09 - Reporting and Interpreting Current Liabilities

97. On the company's 20X0 year-end statement of financial position, the liability related to this note should be reported as which of the following? A. A $12,480 long-term liability. B. A $12,480 current liability. C. A $12,000 long-term liability. D. A $12,000 current liability.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-10 Current Portion of Long-Term Debt

98. Interest rates on notes are usually stated as a(n) A. monthly rate. B. daily rate. C. annual rate. D. semi-annual rate.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

99. Bison Corp. issues a 5 year 8%, $60,000 note payable on March 1. The terms of the note include monthly blended principal and interest payments of $1,217. The entry to record the second instalment payment will show a: A. debit to Notes Payable of $822. B. debit to Cash for $1,217. C. debit to Interest Expense for $400. D. credit to Interest Expense for $395. Calculation: $1,217 - ($59,183 ´ .08/12).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

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Chapter 09 - Reporting and Interpreting Current Liabilities

On October 1, Mystic Window Cleaners borrowed $50,000 from Falconville Credit Union on a 3-month, $50,000, 3% note.

100. What entry must Mystic Window Cleaners make on December 31 before financial statements are prepared, assuming interest is payable at maturity? A. Please see the following information:

Interest Payable Interest Expense

375 375

B. Please see the following information:

Interest Expense Interest Payable

1,500 1,500

C. Please see the following information:

Interest Expense Interest Payable

375 375

D. Please see the following information:

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Chapter 09 - Reporting and Interpreting Current Liabilities

Interest Expense Notes payable

1,500 1,500

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

101. The entry by Mystic Window Cleaners to record payment of the note and accrued interest on January 1 is A. Please see the following information:

Notes payable Cash

50,375 50,375

B. Please see the following information:

Notes payable Interest payable Cash

50,000 375 50,375

C. Please see the following information:

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Chapter 09 - Reporting and Interpreting Current Liabilities

Notes payable Interest payable Cash

50,000 1,500 51,500

D. Please see the following information:

Notes payable Interest expense Cash

50,000 375 50,375

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

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Chapter 09 - Reporting and Interpreting Current Liabilities

102. On Dec 8, 20X0, Peter Goldfarb, CPA, received $1,000 from a customer as an advance payment for accounting services. The payment was credited to service revenues. Thirty percent of the work was performed in December 20X0, with the rest to be done in January 20X1, at which time the customer will be billed. What is the required adjusting entry at year end December 31, 20X0? A. Please see the following information:

Deferred Revenue Service Revenues

300 300

B. Please see the following information:

Service Revenues Deferred Revenue

300 300

C. Please see the following information:

Service Revenues Deferred Revenue

700 700

D. Please see the following information:

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Chapter 09 - Reporting and Interpreting Current Liabilities

Deferred Revenue Service Revenues

700 700

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-11 Deferred Revenues

103. The current portion of long-term debt should be A. paid immediately. B. classified as a current liability on the statement of financial position. C. classified as a long-term liability on the statement of financial position. D. removed from the long-term portion of debt with a journal entry.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-04 Report contingent liabilities. Topic: 09-10 Current Portion of Long-Term Debt

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Chapter 09 - Reporting and Interpreting Current Liabilities

104. On December 31, 20X7, a company has a $500,000 fifteen-year mortgage outstanding. Over the next year, they will make twelve monthly payments of $5,000 representing $33,500 of interest and $26,500 of principal repayment. Which of the following best represents how the mortgage will be reported on the December 31, 20X7 statement of financial position A. Please see the following information:

Current liabilities $26,500

Long-term liabilities $473,500

B. Please see the following information:

Current liabilities $60,000

Long-term liabilities $473,500

C. Please see the following information:

Current liabilities $26,500

Long-term liabilities $440,000

D. Please see the following information:

Current liabilities $60,000

Long-term liabilities $440,000

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Chapter 09 - Reporting and Interpreting Current Liabilities

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-10 Current Portion of Long-Term Debt

105. Under IFRS, a provision is A. a liability of uncertain timing or amount. B. a special fund set aside to pay long-term debt. C. deferred revenue. D. an allowance for future dividends to be paid.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-12 Provisions Reported on the Statement of Financial Position

106. When the occurrence of a liability is dependent on the outcome of some future event, the liability is referred to as a(n) A. commitment. B. accrued liability C. contingent liability. D. potential liability.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-04 Report contingent liabilities. Topic: 09-10 Current Portion of Long-Term Debt

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Chapter 09 - Reporting and Interpreting Current Liabilities

107. On December 31, 20X5, Gold Charter Airlines has $2,000,000 in short-term notes payable due on February 10, 20X6. On January 10, 20X6, Gold arranged a line of credit with Fargo Wells Bank, which allows Gold to borrow up to $1,500,000 at 1% above the prime rate for three years. On February 2, 20X6, Gold borrowed $1,200,000 from Fargo Wells Bank and used $500,000 additional cash to liquidate $1,700,000 of the short-term notes payable. What is the amount of the short-term notes payable that should be reported as current liabilities on Gold's December 31, 20X5 statement of financial position (to be issued on Feb 28, 20X5) is A. $0 B. $300,000 C. $2,000,000 D. $1,200,000

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-10 Current Portion of Long-Term Debt

108. Satin Bedding and Linens secured a $750,000, five- year, 4% note payable on January 1. The loan will be repaid using blended monthly payments with a fixed monthly principal payment of $12,500. Which of the following represents how the loan will be reflected on statement of financial position at the end of the year? A. Please see the following information:

Current portion longterm debt $0

Long-term liabilities note payable $750,000

B. Please see the following information:

Current portion longterm debt $150,000

Long-term liabilities note payable $450,000

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Chapter 09 - Reporting and Interpreting Current Liabilities

C. Please see the following information:

Current portion longterm debt $300,000

Long-term liabilities note payable $450,000

D. Please see the following information:

Current portion longterm debt $0

Long-term liabilities note payable $600,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-10 Current Portion of Long-Term Debt

Serenity Spa sells $25,000 worth of gift certificates in November and December. 25% of the gift certificates are redeemed in December prior to the December 31 year-end.

109. What journal would Serenity Spa make to record the sale of the gift certificates? A. Please see the following information:

Cash Gift card revenue

25,000 25,000

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Chapter 09 - Reporting and Interpreting Current Liabilities

B. Please see the following information:

Gift card revenue Deferred gift card revenue

25,000 25,000

C. Please see the following information:

Prepaid gift cards Gift card revenue

6250 6,250

D. Please see the following information:

Cash Deferred gift card revenue

25,000 25,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-12 Provisions Reported on the Statement of Financial Position

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Chapter 09 - Reporting and Interpreting Current Liabilities

110. What year-end adjusting entry should Serenity Spa make? A. Please see the following information:

Revenues Deferred gift card revenues

6,250 6,250

B. Please see the following information:

Gift card revenues Deferred gift card revenues

18,750 18,750

C. Please see the following information:

Deferred gift card revenues Gift card revenues

6250 6,250

D. Please see the following information:

Gift card revenues Deferred gift card revenue

18,750 18,750

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Chapter 09 - Reporting and Interpreting Current Liabilities

$25,000 ´ 25%.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-12 Provisions Reported on the Statement of Financial Position

Big Top Electronics Inc. offers a two-year warranty on its products. The estimated liability is 4% of sales in the year of sale and 6% in the second year. Sales for 20X0 and 20X1 were: $2,500,000 and $2,800,000, respectively. They incurred no warranty costs in 20X0 but in 20X1 they spent $175,000 on repairs related to the warranties from 20X0 and 20X1.

111. Big Top's warranty liability at the year-end 20X0 is A. $0 B. $150,000 C. $100,000 D. $250,000 $2,500,000 ´ (4% + 6%).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-12 Provisions Reported on the Statement of Financial Position

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Chapter 09 - Reporting and Interpreting Current Liabilities

112. Big Top's warranty expense for 20X0 is A. $250,000 B. $100,000 C. $80,000 D. $150,000 $2,500,000 ´ (4% + 6%).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-12 Provisions Reported on the Statement of Financial Position

113. Big Top's warranty liability as at the end of the 20X1 year is A. $380,000 B. $355,000 C. $75,000 D. $280,000 $250,000 - $175,000 + (2,800,000 ´ (4% + 6%).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 09-04 Report contingent liabilities. Topic: 09-12 Provisions Reported on the Statement of Financial Position

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Chapter 09 - Reporting and Interpreting Current Liabilities

114. Armadillo Appliances sells new and reconditioned kitchen and laundry appliances. Armadillo sold a reconditioned refrigerator for $1,100 on Oct 25, 20X4, with a one-year warranty covering parts and labour. Warranty expense is estimated at 5% of the selling price, and the appropriate adjusting entry is recorded at Dec 31, 20X4. On January 6, 20X5, the refrigerator is returned for warranty repairs. This cost Armadillo $25 in parts and $20 in labour. When recording the January 6, 20X5 transaction, Armadillo would debit warranty expense with A. $45 B. $0 C. $55 D. $25

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-12 Provisions Reported on the Statement of Financial Position

115. A contingent liability is recorded in the accounting records A. if a reasonable estimate of the expected loss can be determined and if it is probable. B. if the contingency has not already been disclosed in the notes to the financial statements. C. if it will possibly become an actual liability, and the exact amount is unknown. D. under no circumstances.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-05 Explain the importance of working capital and its impact on cash flows. Topic: 09-13 Contingent Liabilities

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Chapter 09 - Reporting and Interpreting Current Liabilities

116. Which of the following is correct with respect to a contingent liability that is "reasonably possible" but "cannot reasonably be estimated"? A. It must be recorded and reported as a liability. B. It does not need to be recorded or reported as a liability. C. It must only be disclosed as a note to the financial statements. D. It must be reported as a liability, but not recorded.

117. Max7 Company is an aircraft manufacturer involved in several lawsuits. The liability which could arise as a result of these lawsuits should be recorded on the books if the probability of Max7 owing money as a result of the lawsuits is A. remote and the amount can be reasonably estimated. B. probable and the amount cannot be reasonably estimated. C. reasonably possible and the amount can be reasonably estimated. D. probable and the amount can be reasonably estimated.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-05 Explain the importance of working capital and its impact on cash flows. Topic: 09-13 Contingent Liabilities

118. Cress Company is involved in a lawsuit. Note disclosure of the contingent liability which could arise does NOT have to be presented if the probability of Cress owing money as a result of the lawsuit is which of the following? A. Reasonably possible and the amount cannot be reasonably estimated. B. Probable and the amount cannot be reasonably estimated. C. Remote and the amount cannot be reasonably estimated. D. Reasonably possible and the amount can be reasonably estimated.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 09-05 Explain the importance of working capital and its impact on cash flows. Topic: 09-13 Contingent Liabilities

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Chapter 09 - Reporting and Interpreting Current Liabilities

119. Chester Fireworks, Inc. is involved in a lawsuit. Their lawyers state that it is probable that the jury will find in favour of the plaintiff and Chester will owe two million dollars. Even though the lawsuit is not yet settled, Chester needs to report A. A prepaid expense B. A contingent liability C. A deferred expense D. a contra-asset

120. In 20X3, C Co reported a trade payables turnover ratio of 1.85 and a current ratio of 0.66. Their statement of financial position shows $2.1 billion in marketable securities not included in their current assets and cash flow from operations. Which of the following interpretations is most likely? A. Since the two ratios are fairly high, it indicates C Co has little difficulty paying its bills in a timely manner. B. Since both these ratios are low, it might indicate poor liquidity and inability to pay vendors in a timely manner. C. C Co practices aggressive cash management policies including investing excess cash and using vendors to finance operations by making slow payment to them. D. C Co must be carrying a low amount of current liabilities in comparison to its total liabilities.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 09-06 Compute and interpret the quick ratio. Topic: 09-14 Working Capital Management

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Chapter 09 - Reporting and Interpreting Current Liabilities

121. In 2019, Peppa Co reported an increase in net receivables of $303 million, and an increase in inventory of $284 million. It also experienced an increase in short-term borrowings of $3,921 million and an increase in net payables of $253 million. Calculate the net effect of these changes on the company's cash. A. $3,587 million decrease B. $4,761 million increase C. $3,587 million increase D. $4,761 million decrease Calculation: $3,921 + $253 - $303 - $284 = $3,587.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Compute and interpret the quick ratio. Topic: 09-14 Working Capital Management

122. In 20X3, Toys 4 U reported inventory of $1,902 million and trade payables of $1,415 million. In 20X2, the company reported inventory of $2,464 million and trade payables of $1,280 million. What was the effect on the 20X3 cash flow from operating activities? A. A decrease in cash of $697 million. B. An increase in cash of $697 million. C. A decrease in cash of $427 million. D. An increase in cash of $427 million. Calculation: ($2,464 - $1,902) + ($1,415 - $1,280) = $697.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-06 Compute and interpret the quick ratio. Topic: 09-14 Working Capital Management

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Chapter 09 - Reporting and Interpreting Current Liabilities

123. When trade accounts payables for a company increases from one year to the next, what is the effect on its cash flows? A. A decrease in cash caused by paying down our debt to vendors. B. An increase in cash because we have not paid cash for all the inventory and services purchased on credit during the period. C. A decrease to cash because we will have to pay these liabilities in the future. D. An increase to cash because we have received cash from vendors.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-06 Compute and interpret the quick ratio. Topic: 09-14 Working Capital Management

124. Future income tax obligations should be reported on which of the following? A. A corporation's income tax return. B. A corporation's statement of financial position. C. A corporation's income statement. D. Statement of changes in equity.

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Chapter 09 - Reporting and Interpreting Current Liabilities

125. Robie Inc. reported a profit of $40,000 for 20X0. The income tax return excluded a revenue item of $3,000 (reported on the statement of earnings) because under the tax laws the $3,000 would not be reported for tax purposes until 20X1. Assuming a 30% corporate tax rate, this situation would cause a 20X0 deferred tax amount of which of the following? A. $3,000 (debit) B. $3,000 (credit) C. $900 (debit) D. $900 (credit) Calculation: $3,000 ´ 30% = $900.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-15 Appendix 9A: Deferred Income Tax Assets and Liabilities

126. Income tax expense reported on the income statement is $45,000 for 20X0, and the tax return for 20X0 shows an income tax liability of $42,000 because of a deduction that cannot be taken until 20X1. Deferred income tax amount on the statement of financial position at the end of 20X0 will be which of the following? A. $3,000 debit balance B. $3,000 credit balance C. $42,000 credit balance D. $48,000 credit balance

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-15 Appendix 9A: Deferred Income Tax Assets and Liabilities

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Chapter 09 - Reporting and Interpreting Current Liabilities

127. Situations which require that deferred income tax be reported involve a difference referred to as which of the following? A. A permanent difference. B. A reversing tax inverse difference. C. A temporary difference. D. A significant difference.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-15 Appendix 9A: Deferred Income Tax Assets and Liabilities

128. Deferred income taxes are caused by which of the following? A. A company's inability to pay income tax due in a particular tax year. B. The company is unprofitable currently. C. The fact that the value of one country's currency relative to that of another can change over time. D. Differences in IFRS and Income Tax Act rules pertaining to when revenue and expenses should be recognized.

129. All the following transactions lead to temporary timing differences except: A. the use of estimated warranty costs for calculating warranty expense B. the use of straight-line amortization for accounting purposes C. the recognition of dividend income for dividends received from another Canadian company D. The use of provisions for gift card sales

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Chapter 09 - Reporting and Interpreting Current Liabilities

130. A future tax asset indicates that the company A. had some expenses that were deductible for taxes but are prepaid for accounting purposes. B. expects to pay higher taxes in the future C. paid their taxes for the current year in advance. D. expects a benefit in the form of lower taxes in the future.

131. There is a reciprocal relationship between which of the following? A. Present value of the annuity of $1 and the present value of $1. B. Future value of $1 and the future value of an annuity of $1. C. Present value of $1 and the future value of $1. D. Present value of the annuity of $1 and the future value of annuity of $1.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-18 Present Value of an Annuity

132. If the market rate of interest is 10%, a rational person would be indifferent between receiving $1,100 three years from now and receiving what amount today (Round to the nearest dollar)? A. $783 B. $826 C. $1,000 D. $1,100 Calculation: $1,100 ´ 0.75131 = $826.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-16 Appendix 9B: Present Value Concepts Topic: 09-17 Present Value of a Single Amount

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Chapter 09 - Reporting and Interpreting Current Liabilities

133. Present value can be defined as which of the following? A. Future amount of a sum of money held now. B. Value today of future cash inflow(s). C. Maturity value of a debt. D. Sum of cash inflows over a future period of time.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-16 Appendix 9B: Present Value Concepts

134. Caroline's grandmother promises to give her $5,000 at the end of five years. How much is the money worth today, assuming Caroline could invest the money and earn a 6% annual rate of return? (Round to the nearest dollar). A. $3,736 B. $1,338 C. $4,212 D. $5,637 Calculation: $5,000 ´ 0.74726 = $3,736.

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Chapter 09 - Reporting and Interpreting Current Liabilities

135. Caroline's grandmother promises to give her $1,000 at the end of each of the next five years. How much is the money worth today, assuming Caroline could invest the money and earn a 6% annual rate of return? (Round to the nearest dollar). A. $747 B. $1,338 C. $4,212 D. $5,637 Calculation: $1,000 ´ 4.21236 = $4,212.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-16 Appendix 9B: Present Value Concepts Topic: 09-18 Present Value of an Annuity

136. How much would Caroline have to deposit in the bank today if she will be earning a 6% annual rate of return and wants to have $5,000 in the bank at the end of five years? (Round to the nearest dollar). A. $3,736 B. $4,212 C. $4,737 D. $5,637 Calculation: $5,000 ´ 0.74726 = $3,736.

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Chapter 09 - Reporting and Interpreting Current Liabilities

137. How much would Caroline have to deposit in the bank at the end of each of the next five years if she wishes to have $6,000 in the bank at the end of that period assuming she will be earning 6% annual rate of return? (Round to the nearest dollar.) A. $887 B. $943 C. $1,064 D. $1,187 Calculation: $6,000 ÷ 5.6371 = $1,064.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Topic: 09-17 Present Value of a Single Amount

138. Caroline deposits $3,000 in the bank today. She will be earning 6% interest annually on her deposit. How much money will she have in the bank at the end of 5 years? (Round to the nearest dollar.) A. $3,736 B. $6,691 C. $4,015 D. $28,186 Calculation: $3,000 ´ 1.33822 = $4,015.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-31 Future Value of a Single Amount

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Chapter 09 - Reporting and Interpreting Current Liabilities

139. Calculation of the amount of the equal periodic payments that would be required at the end of each year to accumulate a $20,000 fund at the end of the tenth year is most readily determined by reference to a table that shows which of the following? A. Future value of $1. B. Present value of $1. C. Future value of annuity of $1. D. Present value of a single sum.

140. Linnette, the new bank intern, has been asked to compute the amount that will be available at the end of three years as a result of a single sum that is deposited today. What is the concept that best describes this application? A. Present value of a single amount. B. Present value of an annuity. C. Future value of a single amount. D. Future value of an annuity.

141. Linnette, the new bank intern, has been asked to determine the amount of an annual deposit which would be used to fund a trip to Europe at the end of the fourth year. What is the concept that best describes this application? A. Present value of a single amount. B. Present value of an annuity. C. Future value of a single amount. D. Future value of an annuity.

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Chapter 09 - Reporting and Interpreting Current Liabilities

Short Answer Questions 142. Match the liabilities with their usual classification on the statement of financial position by entering the appropriate letters in the spaces. Usual Classification A. Current liability B. Long-term liability C. Current or long-term liability D. None of the above Liabilities

(1) Rent payable (2) Payroll Income Taxes payable (3) Interest payable (4) Mortgage payable (due in 2 years) (5) Bond payable, current portion (6) Notes payable (7) Cash deposits (advances) received from customer for services to be performed in six months (8) Bonds payable (due in 6 years) (9) Future income tax (a credit balance) (10) Accumulated Depreciation (11) Employee income taxes withheld (12) Trade receivables (13) Trade payables (14) Allowance for doubtful accounts (15) Current Income tax payable

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Chapter 09 - Reporting and Interpreting Current Liabilities

(1) A, (2) A, (3) A, (4) B, (5) A, (6) C, (7) A, (8) B, (9) C, (10) D, (11) A, (12) D, (13) A, (14) D, (15) A

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-01 Liabilities Defined and Classified

143. Hallberg Company reported total assets of $165,000; current assets of $22,000; total shareholders' equity of $57,000; and non-current liabilities of $85,000. Required: (show computations). Compute Working Capital. $___________________ 1. $165,000 = 85,000 + ? + 57,000 $165,000 - 85,000 - 57,000 = current liabilities of $23,000 Working Capital = $22,000 - 23,000 = <$1,000>

144. Shirlen Company has the following partial list of account balances at year end:

Trade payables Trade receivables Bonds payable (due in 5 years) Cash Equipment (net) Land Notes payable (due in 6 months) Salaries payable Cost of Goods Sold

$500 1,600 80,000 2,000 5,000 9,900 800 700 5,000

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Chapter 09 - Reporting and Interpreting Current Liabilities

Required: A. Determine the amount of working capital. B. Assume that cash is used to pay the balance due on trade payables. Compute the new amount of working capital. C. Compute the trade payables turnover ratio. A. Working capital = $3,600 - 2,000 = $1,600. B. Current assets = $1,500 + 1,600 = $3,100. Current liabilities = $800 + 700 = $1,500. Working capital = $3,100 - 1,500 = $1,600 C. Cost of Goods Sold/T/P = $5,000/$500 = 10 times.

145. Use the following financial statement information: Financial Statement Information

Current Assets Total Assets Current Liabilities Total Liabilities

C Co 20X2 $4,362

C Co 20X1 $6,251

P Co 20X2 $6,380

P Co 20X1 $5,969

22,660 7,914

20,101 4,257

19,145 8,640

16,881 7,379

16,259

13,165

10,742

9,607

Calculate the following:

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Chapter 09 - Reporting and Interpreting Current Liabilities

a. C Co's 20X2 current ratio b. C Co's 20X1 current ratio c. C Co's 20X2 working capital d. C Co's 20X1 working capital e. P Co's 20X2 current ratio f. P Co's 20X1 current ratio g. P Co's 20X2 working capital h. P Co's 20X1 working capital

a. 0.55 ($4,362/$7,914) b. 1.47 ($6,251/$4,257) c. -$3,552 ($4,362 - $7,914) d. 1,994 ($6,251 - $4,257) e. 0.74 ($6,380/$8,640) f. 0.81 ($5,969/$7,379) g. -$2,260 ($6,380 - $8,640) h. -$1,410 ($5,969 - $7,379).

146. Mountain Gear Corporation has the following selected accounts after posting adjusting entries:

Accounts Payable Notes Payable, 3-month Accumulated AmortizationEquipment Notes Payable, 5-year, 4% Employee Benefits Expense Interest Payable Mortgage Payable Provincial Sales Tax Payable

$79,000 90,000 14,000 30,000 6,000 1,500 250,000 39,500

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Chapter 09 - Reporting and Interpreting Current Liabilities

Required: 1. Prepare the current liability section of Mountain Gear Corporation's statement of financial position, assuming $15,000 of the 5-year note is payable next year. 2. Comment on Mountain Gear's liquidity, assuming total current assets are $450,000. 1. Mountain Gear Corporation Partial Statement of Financial Position Current Liabilities Current portion of long-term debt Notes payable, 3-month Accounts payable Provincial sales tax payable Interest payable Total current liabilities

$15,000 90,000 79,000 39,500 1,500 $225,000

2. The liquidity position looks favourable. If all current liabilities are paid out of current assets, there would still be $125,000 of current assets (working capital). The current ratio is 1.78 to 1 and it appears Mountain Gear Corporation has sufficient current resources to meet their current obligations.

Accessibility: Keyboard Navigation Blooms: Analyze Blooms: Apply Difficulty: Medium Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-01 Liabilities Defined and Classified Topic: 09-02 Current Liabilities

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Chapter 09 - Reporting and Interpreting Current Liabilities

147. At the end of the annual accounting period, the adjusting entries for the following three items have not been made. You are to provide the 20X1 adjusting entry for each item. A. Unpaid wages for the last two days of December, 20X1 amounting to $3,200 have not been recorded (disregard payroll taxes). B. On December 1, 20X1 rent revenue of $600 was collected for December and January. (Rent revenue was credited for a total of $600). C. A $4,000, six-month, 10% interest-bearing note payable was singed on October 1, 20X1. A. Wage expense Wages payable

3,200 3,200

B. Rent Revenue Rent collected in advance

300 300

C. Interest expense Interest payable

100 100

4,000 ´ 10% ´ 3/12 = 100

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Learning Objective: 09-04 Report contingent liabilities. Topic: 09-04 Accrued Liabilities Topic: 09-09 Notes Payable Topic: 09-11 Deferred Revenues

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Chapter 09 - Reporting and Interpreting Current Liabilities

148. Warner Company borrowed $38,000 on a 12% one-year, interest bearing note dated November 1, 20X0. The annual accounting period ends on December 31. Give journal entries on the following dates: A. November 1, 20X0 B. December 31, 20X0 C. October 31, 20X1 A. Cash Note payable

38,000 38,000

B. Interest Expense Interest Payable ($38,000 × 12% × 2/12 = 760)

760 760

C. Note Payable Interest payable Interest expense Cash Assumes no reversing entry on 1/1/20X1 ($38,000 × 12% × 12/12 = 3,800)

38,000 760 3,800 42,560

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Chapter 09 - Reporting and Interpreting Current Liabilities

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

149. Midland Company borrowed $5,000 on an 8% (annual rate) interest-bearing note payable on March 1, 20X2. The maturity date of the note (and payment of all interest) is September 1, 20X3. The accounting period ends December 31. Give the entry for each of the dates. Assume simple interest. Round to the nearest dollar. A. March 1, 20X2

Cash Note payable

5,000 5,000

B. December 31, 20X2

Interest expense Interest payable

333 333

C. September 1, 20X3

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Chapter 09 - Reporting and Interpreting Current Liabilities

Note Payable (principal) Interest payable (as per above) Interest expense ($5,000 × 8% × 8/12) Cash [5,000/($5,000 × 8% × 8/12)]

5,000 333 267 5,600

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-04 Report contingent liabilities. Topic: 09-09 Notes Payable

150. The following data were provided by the detailed payroll records of Journey Corporation for the month of March 20X0:

Salaries Wages Income taxes withheld Union dues

$20,000 15,000 7,350 175

Income taxes at an average 7.65% rate (no employee has reached the maximum) Required: 1. Give the March 31, 20X0 entry to record the payroll and related employee deductions. 2. Give the March 31, 20X0 entry to record the employer's payroll income tax expense. Requirement 1:

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Chapter 09 - Reporting and Interpreting Current Liabilities

Salaries expense Wages expense Liability for income taxes withheld employees Income taxes payable - employees ($35,000 × 7.65%) Union dues payable Cash (take-home pay)

20,000 15,000 7,350 2,678 175 24,797

Requirement 2:

Employment benefit (payroll tax) expense Income taxes payable - employer

2,678 2,678

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-04 Accrued Liabilities

9-74

Chapter 09 - Reporting and Interpreting Current Liabilities

151. The following is a partial list of account balances for Van Buskirk Inc. as of December 31, 20X1:

Trade Payables Trade Receivables Bonds payable (100% due in 10 years) Mortgage payable (10% due within one year) Notes payable (due in 6 months) Salaries payable Sales revenue Current income taxes payable Deferred revenue

$5,000 6,000 40,000 10,000 2,000 800 49,000 8,000 800

Required: Prepare the liability section of Van Buskirk's classified statement of financial position for December 31, 20X1. Van Buskirk, Inc. Partial Statement of Financial Position As at December 31, 20X1

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Chapter 09 - Reporting and Interpreting Current Liabilities

LIABILITIES Current Liabilities Trade payables Notes payable Mortgage payable (current portion) Salaries payable Current taxes payable Deferred revenue Total Current Liabilities Long term liabilities Bond payable Mortgage payable Total Long-Term Liabilities TOTAL LIABILITIES

5,000 $2,000 1,000 800 8,000 800 $17,600 40,000 9,000 $49,000 $66,600

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-02 Current Liabilities

152. The following data is available for Toys 4 U for the years 2016 through 2019: Toys 4 U Financial Data

Cost of sales Accounts payable

2019 $8,191 1,415

2018 $7,710 1,280

2017 $6,892 1,346

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2016 $6,592 1,182

Chapter 09 - Reporting and Interpreting Current Liabilities

1. Calculate the trade payables turnover ratio for the following years:

a. 2019 b. 2018 c. 2017

2. Calculate the number of days it is taking Toys 4 U to pay their vendors:

a. 2019 b. 2018 c. 2017

3. Explain whether Toys 4 U is doing a better job at paying their vendors in a timely manner. (1a) 6.08 ($8,191/ [$1,415 + $1,280]/2); (1b) 5.87 ($7,710/ [$1,280 + $1,346]/2); (1c) 5.45 ($6,892/ [$1,346 + $1,182]/2). (2a) 60 days (365/6.08); (2b) 62 days (365/5.87); (2c) 67 days (365/5.45). (3) Over the three-year period, Toys 4 U has managed to reduce the time it takes to pay their vendors by 7 days or a week. They have made some improvement in making timely payment to vendors but they still take two months to pay. If their suppliers offer them 30-day credit or even a discount for early payment, then that 60-day payment period is not very good. We would really be able to see if their payable payment period is in line with other big retail companies by comparing their ratio to similar companies.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-03 Accounts Payable

9-77

Chapter 09 - Reporting and Interpreting Current Liabilities

153. Monmouth Limited has a December 31 year-end. On December 1, 20X6 Monmouth had the following current liabilities listed on its books:

Bank overdraft Accounts payable CPP, EI and income tax payable Unearned revenues

$18,750 $122,500 $6,620 $12,000

During December 20X6 Monmouth engaged in the following transactions:

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Chapter 09 - Reporting and Interpreting Current Liabilities

Dec 1 Dec 2

Dec 7 Dec 8 Dec 12 Dec 19 Dec 20 Dec 21 Dec 22

Dec 28

Bought $20,000 of inventory on credit, terms of 30 days Negotiated a $40,000 line of credit with their bank and drewdown $18,750 to replace the bank overdraft. Interest will be charged at 4%, based on the average balance outstanding during the month, and paid on the last day of the month. Sold goods worth $30,000 on which they had previously received a $12,000 deposit. The balance was due in 30 days. Paid $63,000 owing to a supplier Paid amounts due to federal government for the payroll amounts outstanding from November 30. Sold $66,000 of goods half for cash, half on credit. Made a $10,000 payment on the line of credit Received $5,000 from a client for work that will be performed in January 2012. Received a lawyer's letter stating that a customer is suing the company for failure to clear the snow away from the front of the business premises. The customer fell and was injured as a result. Monmouth's lawyer says that it is likely that the company will be required to pay but she is unable to reasonably determine the amount of the loss. Paid the monthly payroll amounts to employees. The gross payroll was $16,200. Amounts withheld from the employees' cheques were as follows: Canada pension plan premiums (CPP) $1,200 Employment insurance premiums (EI) $1,850 Income tax $2,800 At the same time, the company also recorded their liability for amounts due to the government for CPP and EI. Assume the employer must match the employees' contribution for both EI and CPP.

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Chapter 09 - Reporting and Interpreting Current Liabilities

Required: 1. Prepare all the journal entries required as a result of the above transactions. 2. Prepare the current liabilities section of the balance sheet at December 31, 20X6. 1. Dec 1

Inventory Accounts payable To record purchase of inventory

20,000

Dec 2

18,750

Bank overdraft Bank loan current To record draw-down on line of credit

20,000

18,750

Dec 7

Accounts 18,000 receivable Unearned 12,000 revenues Sales 30,000 To record sale and reverse previously unearned customer deposit

Dec 8

Accounts payable Cash To record payment to supplier

63,000 63,000

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Chapter 09 - Reporting and Interpreting Current Liabilities

Dec 12

CPP, EI, 6,620 income tax payable Cash To record payment of payroll expense for November

Dec 19

Cash Accounts receivable Sales

6,620

33,000 33,000 66,000

To record sales

Dec 20

Bank loan Cash To record payment on bank loan

10,000

Dec 21

5,000

Cash Unearned revenues To record deposit received from customer

10,000

5,000

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Chapter 09 - Reporting and Interpreting Current Liabilities

Dec 22

Dec 28

This is a contingent liability. Since no estimate can be made, no accrual is required. Monmouth should disclose the contingency in the notes to the financial statements.

Wage expense CPP payable EI payable Income tax payable Cash To record payroll expense for December

16,200 1,200 1,850 2,800 10,350

Dec 28

Wage benefits 3,050 expense CPP payable EI payable To record employer's wage benefits expense for December

Interest expense 45 Cash To record interest on bank loan *Avg bal. = (18,750 + 8,750)/2 = 13,750 × .04 × 30/365 = 45.21

1,200 1,850

Dec 31

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Chapter 09 - Reporting and Interpreting Current Liabilities

2. Monmouth Limited Partial Statement of Financial Position December 31, 20X6 Bank loan (18,750 - 10,000) Accounts payable (122,500 + 20,000 - 63,000) CPP and EI payable (6,620 - 6,620 + 3,050 + 3,050) Income taxes payable Unearned revenues (12,000 12,000 + 5,000)

$8,750 79,500 6,100 2,800 5,000 $102,150

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Chapter 09 - Reporting and Interpreting Current Liabilities

154. 1. What is a contingent liability? 2. When must a contingent liability be recorded through a journal entry? 3. When should a contingent liability be disclosed in the footnotes to the financial statements? 4. When is disclosure of a contingent liability not required? 5. Give two examples of contingent liabilities. 1. Contingent liabilities are potential liabilities which arise due to past events. 2. Whether or not the potential liability becomes a recorded liability depends upon the outcome of future events. For example, a company is currently involved in a product liability lawsuit the company may have to pay the plaintiff if the settlement is unfavourable. A contingent liability must be recorded if it is probable that the future events will occur and the amount can be reasonably estimated. 3. Contingent liabilities should be disclosed in the footnotes to the financial statements if it is probable that future events will occur but the amount cannot be reasonably estimated. Footnote disclosure should also occur if it is reasonably possible that the future events will occur whether or not it can be reasonably estimated. 4. Disclosure is not required if the probability of future events occurring is remote. 5. Impending lawsuit; Product warranties;

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 09-05 Explain the importance of working capital and its impact on cash flows. Topic: 09-13 Contingent Liabilities

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Chapter 09 - Reporting and Interpreting Current Liabilities

155. In 20X2, The W D Company reported the following increases or decreases in current assets and current liabilities. Identify whether each of these increases or decreases caused cash to increase or decrease. Show increases with a (+) in front of the amount and decreases with a (-) in front of the amount in the column labelled cash effect.

Changes in current assets and liabilities Account Balance Cash Effect (+/-) Change Receivables - CA Decrease $366 1. Inventories - CA Decrease $103 2. Film and television Increase $848 3. costs - CA Trade payables - CL Decrease $179 4. Current portion of Increase $292 5. borrowings - CL Unearned royalties Increase $69 6. CL Account

(1) +$366, (2) +$103, (3) -$848, (4) -$179, (5) +$292, (6) +$69.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 09-06 Compute and interpret the quick ratio. Topic: 09-14 Working Capital Management

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Chapter 09 - Reporting and Interpreting Current Liabilities

156. Company P had pretax profit of $30,000 in 20X0 and $34,000 in 20X1. A revenue of $2,000 was included correctly on the 20X0 income statement and was properly reported on the 20X1 income tax return. The corporate income tax rate was 25%. Give the entries relating to the incurrence of the tax liability for 20X0 and 20X1: 20X0: 20X1: 20X0:

Interest tax expense ($30,000 × 25%) Future income tax ($2,000 × 25%) Income tax payable ($30,000 - 2,000) × 25%

7,500 500 7,000

20X1:

Interest tax expense ($34,000 × 25%) Future income tax ($2,000 × 25%) Income tax payable [($34,000 - 2,000) × 25%]

8,500 500 9,000

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Chapter 09 - Reporting and Interpreting Current Liabilities

157. Cathy Company reported the following summary amounts for its second year ended December 31, 20X1:

Revenues Expenses (excluding income tax) Income taxes paid for 20X1

$100,000 80,000 10,000

Income tax rate, 40% Give the entry to record income tax for 20X1. Please review the following information:

Income tax expense ($100,000 - 80,000) × 40% Future income tax ($10,000 - 8,000) Paid Cash

8,000 2,000 10,000

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Chapter 09 - Reporting and Interpreting Current Liabilities

158. What are "Future Income taxes"? Where specifically would they appear in financial statements? Future Income taxes arise due to the fact that the income tax expense recognized on the income statement is based upon "book" profit (derived using IFRS) and the amount of income tax actually owed to the government is based upon rules established by the Income Tax Act (ITA) which are reported on the tax return. IFRS and ITA rules sometimes vary on when certain expenses and revenue should be recognized. Due to these timing differences, the income tax expense shown on the income statement could be more, or less than the amount actually owed to the government in a particular year. The Future Income tax account is used to record this difference. Future Income tax could be an asset on the statement of financial position or it could be a liability, depending upon the nature of the recognition difference.

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 09-01 Define, measure, and report current liabilities. Topic: 09-15 Appendix 9A: Deferred Income Tax Assets and Liabilities

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Chapter 09 - Reporting and Interpreting Current Liabilities

159. The following table values are provided for use in solving the following independent problems (show computations): n=5

Value Future value of $1 Present value of $1 Future value of annuity of $1 Present value of $1*

6% 1.3382

7% 1.4026

8% 1.4693

.7473

.7130

.6806

5.6371

5.7507

5.8666

4.2124

4.1002

3.9927

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Chapter 09 - Reporting and Interpreting Current Liabilities

*Ordinary annuity A. Company A deposited $20,000 in a savings account on January 1, 20X1 that will accumulate 6% interest each December 21. 1. What will be the fund balance at the end of Year 5 2. How much interest will be earned by the end of Year 5? B. Company B needs to accumulate a $50,000 fund by making five equal annual deposits. Assuming a 7% interest accumulation, how much must be deposited at the end of the year? C. Company C has new machine that has an estimated life of five years and a $5,000 residual value. Assuming an 8% interest rate, what is the present value of the estimated residual value? D. Company D owes a $50,000 debt that is now due (January 1, 20X1). Arrangements have been made to pay it off in five equal annual installments, starting December 31, 20X1 (an ordinary annuity situation). 1. Assuming 8% interest, how much will the annual payment be? 2. Give the entry for Company D above for the first payment on December 31, 20X1 on the note payable. A. 1. $20,000 ´ 2.3382 (Fn = 5:1; I = 6%) = $26.764 2. $26,764 - 20,000 = $6,764 B. $50,000/5.7507 (Fn = 5; I = 7%) = $8,695 C. $5,000 ´ 0.6806 (Pn = 5; U = 8%) = $3,403 D. 1. $50,000/3.9927 (Pn = 5; I = 8%) = $12,523

2. Note Payable Interest Expense Cash

8,523 4,000 12,523

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Chapter 09 - Reporting and Interpreting Current Liabilities

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 09-02 Compute and interpret the accounts payable turnover ratio. Learning Objective: 09-03 Report notes payable, and explain the time value of money. Learning Objective: 09-04 Report contingent liabilities. Topic: 09-17 Present Value of a Single Amount Topic: 09-18 Present Value of an Annuity Topic: 09-31 Future Value of a Single Amount Topic: 09-32 Future Value of an Annuity

160. At the beginning of Year 1, Mesa Corporation placed $10,000 in a savings account at 9%. A. Assuming no withdrawals, complete the following tabulation (round to the nearest dollar). B. Give the required journal entry at the end of Year 10 to record only the year 10 earnings:

Year-end

Balance in the Savings Account

Total Interest Earned to Date

3 9 10

Please review the following information:

Year-end 3 9 10

Balance in the Savings Account $10,000 × 1.2950 = $12,950 10,000 × 2.1719 = 21,719 10,000 × 2.3674 = 23,674

Total Interest Earned to Date $2,950 11,719 13,674

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Chapter 09 - Reporting and Interpreting Current Liabilities

Savings fund Interest revenue ($23,674 - $21,719)

1,955 1,955

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 09-03 Report notes payable, and explain the time value of money. Topic: 09-31 Future Value of a Single Amount

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

Chapter 10 Reporting and Interpreting Non-current Liabilities

True / False Questions 1. Notes payable usually require the borrower to pay interest. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-01 Describe the characteristics of long-term notes and bonds payable. Topic: 10-01 Characteristics of Long-Term Notes and Bonds Payable

2. Bonds often are a superior method of financing in comparison with issuance of capital shares because of both the (a) leverage effects and (b) tax deductibility of interest payments. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-01 Describe the characteristics of long-term notes and bonds payable. Topic: 10-01 Characteristics of Long-Term Notes and Bonds Payable

3. A long-term note payable is often secured by collateral. TRUE

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

4. All long-term note payables are typically secured. FALSE

5. Bonds are debt instruments issued by corporations and government units in order to raise large amounts of money. TRUE

6. Most notes are not interest bearing. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-01 Describe the characteristics of long-term notes and bonds payable. Topic: 10-01 Characteristics of Long-Term Notes and Bonds Payable

7. Notes payable are sometimes used instead of accounts payable. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

10-2

Chapter 10 - Reporting and Interpreting Non-current Liabilities

8. A note payable must always be paid before an account payable. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

9. A $20,000, 5%, 9-month note payable requires an interest payment of $750, if interest is due at maturity. TRUE Calculation: $20,000 ´ 5% ´ (9/12) = $750.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

10. With an interest-bearing note, the amount of cash received upon issue of the note generally exceeds the note's face value. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

11. Interest expense on a note payable is only recorded at maturity. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

10-3

Chapter 10 - Reporting and Interpreting Non-current Liabilities

12. Each payment made on a long-term note payable usually consists of both interest and principal TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

13. Interest expense on fixed principal long-term notes does not change each payment. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

14. When a mortgage payment is made, the entire amount is debited to Interest Expense. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

15. The contractual interest rate is always equal to the market rate of interest on the date that bonds are issued. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

16. Bonds are traded on an organized exchange. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-06 Reporting Bond Transactions

17. Bonds are a form of interest-bearing notes payable. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-06 Reporting Bond Transactions

18. If a bond has a face value of $5,000 and a coupon rate of 6 percent, then the interest paid semi-annually will be $150. TRUE Calculation: $5000 ´ 6% ´ (6/12) = $150.

19. The effective (market) interest rate almost always exceeds the stated interest rate on bonds. FALSE

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

20. When the effective market interest rate is higher than the coupon interest rate, this bond can be purchased at a discount. TRUE

21. The carrying amount of a bond is equal to the maturity value on the date of maturity. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-09 Bonds Issued at a Discount

22. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments added to the premium. FALSE

23. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium. TRUE

10-6

Chapter 10 - Reporting and Interpreting Non-current Liabilities

24. The difference between the carrying amount and the amount paid to retire the bonds is reported as a gain or loss, depending on the circumstances. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

25. The carrying amount of bonds issued at a discount will initially be higher than the face value. FALSE

26. The calculation of interest to be paid each interest period on a bond payable is not influenced by any premium or discount upon issue. TRUE

27. The carrying value (book value) of a bond payable is equal to the maturity amount of the bond plus any unamortized discount or premium. FALSE

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

28. If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual rate of interest. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

29. If the market rate of interest at the date of a bond issue is greater than the stated interest rate, the bond will be issued at a premium. FALSE

30. If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating. FALSE

31. A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market rate of interest. FALSE

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

32. The market rate of interest on bonds equals the stated rate of interest if the bonds were sold at face value. TRUE

33. If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date. FALSE

34. A bond sold at a discount will pay total cash payments for interest that is more than the total interest expense recognized over the period the bond is issued. FALSE

35. If bonds are issued at a premium, the carrying amount of the bonds will be greater than the face amount of the bonds for all periods prior to the bond maturity date. TRUE

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

36. If the market rate of interest is greater than the coupon rate bonds will sell at a discount. TRUE

37. If $240,000, 3%, bonds are issued on January 1, and pay interest semi-annually, the amount of interest paid on July 1 will be $3,600. TRUE Calculation: $240000 ´ 3 % ´ (6/12) = $3,600.

38. The times interest earned ratio uses accrual based figures from the income statement for its calculation. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

39. The times interest earned ratio measures the ability of a company to meet its interest obligations with resources from its operating activities. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

10-10

Chapter 10 - Reporting and Interpreting Non-current Liabilities

40. A high growth rate company may have a low times interest earned ratio because it has used debt to finance property, plant and equipment assets that are not yet generating a level of profits expected to materialize in the future. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

41. The issuance and retirement of bonds have significant impact on investing cash flows. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-08 Explain how financing activities are reported on the statement of cash flows. Topic: 10-16 Other Non-Current Liabilities

42. If $100,000 bonds with a carrying amount of $93,500 are redeemed at 98, a loss on redemption will be recorded. TRUE Calculation: $93,500 - ($100,000 ´ 98%) = ($4,500).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

43. Calculating the present value of bonds determines the price at which they should sell. TRUE

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

44. The effective-interest method of amortization results in a constant percentage rate. TRUE

45. Typical non-current liabilities include lease obligations, asset retirement obligations, accrued retirement benefits liability, and deferred income taxes. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-06 Describe other non-current liabilities. Topic: 10-16 Other Non-Current Liabilities

46. When the effective-interest amortization method is used, the related interest expense for the period is determined by multiplying the stated interest rate by the book value of the bond at the beginning of the current period. FALSE

47. Under the effective-interest method, the interest paid each year is the same but the interest expense recorded is different. TRUE

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

48. A high debt to equity ratio indicates reliance on creditor financing, thereby increasing the of bankruptcy. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-07 Compute and interpret the debt-to-equity ratio. Topic: 10-16 Other Non-Current Liabilities

49. The debt to total assets ratio measures the percentage of the total assets provided by creditors. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-07 Compute and interpret the debt-to-equity ratio. Topic: 10-16 Other Non-Current Liabilities

50. The times interest earned ratio is calculated by dividing net earnings by interest expense. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

51. Bonds held as investments should be reported in the intangible assets section of the statement of financial position. FALSE

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

52. The financial leverage ratio compares the amount of capital supplied by creditors to the amount supplied by owners. TRUE

53. The financial leverage ratio is a measure of a company's profitability. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 10-01 Describe the characteristics of long-term notes and bonds payable. Topic: 10-01 Characteristics of Long-Term Notes and Bonds Payable

Multiple Choice Questions 54. When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following are not provisions specified in the indenture? A. Dates of interest payments. B. Rate of interest to be paid. C. Cash to be received at the issue date. D. Maturity date.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

55. Positive financial leverage occurs in which of the following situations? A. Interest payments can be deducted for income tax purposes. B. The company's after-tax return on total assets is less than the after-tax cost of borrowing. C. The return to the owners is enhanced through the use of debt financing. D. Payment of resources to creditors is limited to the required interest payments while the return of the principal borrowed is not required.

56. Bonds payable usually are classified on the statement of financial position as which of the following? A. Current liabilities. B. Long-term liabilities. C. Investments and funds. D. Current assets.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-01 Describe the characteristics of long-term notes and bonds payable. Topic: 10-01 Characteristics of Long-Term Notes and Bonds Payable

57. Bonds usually are issued to obtain cash for what purpose? A. Meeting working capital needs. B. Acquisitions of long-term assets. C. Paying a dividend. D. Investing in short-term marketable securities.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

58. A bond issue is a form of: A. equity financing B. debt financing C. hybrid financing D. bank loan

Note to Instructor: Present and future value tables are needed for this question.

59. On January 1, 20X1, Ross Company acquired a truck that had a purchase price of $20,000. The seller agreed to allow Ross to pay for the truck over a two-year period at 10% interest with equal payments due at the end of 20X1 and 20X2. What is the amount of each annual payment the company must make (round to the nearest dollar)? A. $11,524 B. $14,151 C. $17,751 D. $22,267 Calculation: $20,000 ÷ 1.73554 = $11,524.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

Bennett Industries purchased a large piece of equipment from Crumpet Company on January 2, 20X1. Bennett signed a note, agreeing to pay Crumpet $400,000 for the equipment on December 31, 20X3. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 2, 20X1, Bennett recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

60. On December 31, 20X1, Bennett recorded an adjusting entry to account for interest that had accrued on the note. What is the approximate amount of interest expense that would have accrued at December 31, 20X1? A. $25,402 B. $32,000 C. $76,200 D. $96,000 Calculation: $317,520 ´ 8% = $25,402.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

61. On Bennett's 20X1 year-end statement of financial position, the book value of the liability for notes payable related to this purchase would equal which of the following? (Round discount factor to 4 decimal places.) A. $317,520 B. An amount less than $317,520. C. An amount more than $317,520. D. An amount more or less than $317,520 depending upon the prevailing market interest rate for the year.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

62. Bennett accrued interest annually. On December 31, 20X3, the due date of the note, Bennett paid the amount due and recorded the transaction with which of the following? (Round discount factor to 4 decimal places.) A. A debit to notes payable for $400,000. B. A debit to notes payable for $317,520. C. A credit to notes payable for $400,000. D. A credit to notes payable for $317,520.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

63. Note disclosures for long-term debt generally include all of the following EXCEPT A. call provisions and conversion privileges. B. names of significant debt holders. C. assets pledged as security. D. restrictions imposed by creditors.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

64. Which of the following statements pertaining to instalment notes with blended principal and interest payments is correct? A. The portion of each instalment applied to the interest and principal will remain constant. B. The portion of the instalment applied to the principal will increase, while the portion applied to the interest will decrease over time. C. The portion of the instalment applied to the principal will decrease, while the portion applied to the interest will increase over time. D. The portion of the instalment applied to the interest will depend on prevailing market interest rates, with the difference being applied to the principal.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

65. On January 1, 2019, Carter Ltd. issued a 15-year, 5%, $600,000 note payable, with annual fixed principal payments of $40,000, plus interest. The cash payment for the first year is: A. $30,000 B. $40,000 C. $42,000 D. $70,000 Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

66. Assume that you borrow $10,000 at an annual interest rate of 6%. Your loan agreement calls for monthly payments of $200, which include both interest and principal. Your first payment is made one month after you received the loan. The amount of interest and principal applied to your first instalment, respectively, would be: A. $140 and $60. B. $150 and $50. C. $50 and $150. D. $60 and $150. Calculation: Interest: = $50 (($10,000 ´ 6%)/12); Principal: $150 ($200 - $50).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

67. Tech Magic purchased a new AI system and in return signed a three-year $30,000 noninterest-bearing note payable. An investigation by the company's accountant revealed that similar notes have market rates of interest around 8%. At what amount should the note payable be initially recorded on Tech Magic's financial statements? (Round discount factor to 4 decimal places. Round the final answer to nearest whole dollar) A. $25,771 B. $30,000 C. $23,815 D. $25,770 $30,000/(1.08)^3 = $23,815.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

68. Mastertack Inc. bought an asset and signed a four-year non-interest-bearing note for the full amount. If the note were recorded at its face value, which of the following statements would be true? A. Both assets and liabilities will be overstated B. Both assets and liabilities will be understated C. Only liabilities will be overstated D. Only liabilities will be understated

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

69. Most of the information regarding a company's long-term debt can be found: A. on the cash flow statement. B. in the annual report. C. in the executive summary. D. in the notes to the financial statements.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

70. On January 1, 2016, Peak Industrial Company purchased a machine. The seller agreed that a total of $9,000 would be paid over a three-year period--$3,000 per year at the end of 2016, 2017, and 2018. At the time the machine was purchased, the market rate of interest was 10%. What amount should be debited to the asset account, Machinery, on the date of purchase (round to the nearest dollar)? (Round discount factor to 4 decimal places. Round the final answer to nearest whole dollar) A. $7,460 B. $9,000 C. $6,762 D. $9,948 PV of the three cash flows at 10% discount rate is 7,460.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

71. You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two equal payments after the acquisition date. What is the interest concept that best describes this application? A. Present value of a single amount. B. Present value of an annuity. C. Future value of a single amount. D. Future value of an annuity.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

72. On January 1, 20X1, Tie Company purchased a machine that had a sticker (list) price of $22,000. The seller agreed to allow Tie Company to pay for the machine over a three-year period at 10% interest on the unpaid balance and with equal payments of $8,444 due at the end of 20X1, 20X2, and 20X3. What is the amount that should be debited to the asset account, Machinery, on the day the contract was initiated is (rounded to the nearest dollar)? A. $20,999 B. $22,000 C. $25,332 D. $27,865

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

73. If the market interest rate is higher than the coupon interest rate (or stated rate) of the bond, the bond sells: A. at face value. B. at a premium. C. at a discount. D. It is undeterminable.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

74. When a bond is issued at a discount, the amount of interest expense for an interest period is calculated by multiplying the _______ amount times the _______ interest rate during the period. A. carrying, market B. face, market C. carrying, stated D. face, stated

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-09 Bonds Issued at a Discount

75. Which item listed below does not influence the issue price (present value) of a bond? A. The reason the bond was issued B. The dollar amounts to be received C. The length of time until the amounts are received D. The market rate of interest

76. If a bond is issued at a premium, the coupon rate is: A. equal to the effective rate. B. greater than the effective rate. C. less than the effective rate. D. not used to determine the bond's sale price.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-01 Describe the characteristics of long-term notes and bonds payable. Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-06 Reporting Bond Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

77. If a bond is issued at a discount, the coupon rate is: A. equal to the effective rate. B. greater than the effective rate. C. less than the effective rate. D. not used to determine the bond's sale price.

78. When the bond liability reported on the statement of financial position increases each year, this indicates that the bond was: A. issued at face value. B. issued at a discount. C. issued at a premium. D. issued at net realizable value.

79. On January 1, 20X1, Fast Logistics Corp. issued $3,000,000 par value 12%, 10-year bonds which pay interest each December 31. If the market rate of interest was 14%, what should the issue price of the bonds be? (Hint: The present value factor for $1 in 10 periods at 12% is 0.3220 and at 14% is 0.2697. The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.) (Round discount factor to 4 decimal places. Round the final answer to nearest whole dollar) A. $2,686,896 B. $2,843,172 C. $3,000,000 D. $3,339,084 Calculation: ($360,000 × 5.2161) + ($3,000,000 × 0.2697) = $2,686,896. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-09 Bonds Issued at a Discount

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

80. When a bond investment is sold (issued) at a discount, subsequent amortization of the discount does which of the following? A. Decreases interest expense. B. Increases interest expense. C. Has no effect upon interest expense. D. Decreases interest in the bond.

81. Which of the following is true about bonds? A. It is common for companies to both retire debt and issue new bonds in the same year as a way to replace higher interest rate debt with lower rate issuances. B. Payment of interest is an investing activity since we would not have interest unless we borrowed money or sold bonds to the public. C. Retractable bonds require cash outflow connected to investing when the issuing corporation redeems the bonds. D. The corporation will have to pay cash to bond investors when those investors demand to call the bonds.

82. Bond discounts should be amortized to comply with the A. cost principle. B. matching process. C. revenue recognition principle. D. full disclosure principle.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

83. On the maturity date of bonds payable after interest has been paid, the issuing company will do which of the following? A. Record a loss of the market rate of interest on the maturity date exceeds the stated rate of interest. B. Pay bondholders the original amount the bondholders paid to purchase the bonds. C. Debit Bonds Payable and credit Cash for the par value of the bonds. D. Debit Cash and credit Bonds Payable for the carrying amount of the bonds.

84. If bonds have been issued at a discount, then over the life of the bonds the A. carrying amount of the bonds will decrease. B. carrying amount of the bonds will increase. C. interest expense will decrease. D. unamortized discount will increase.

85. The amortization of a bond discount results in periodic interest expense A. greater than the constant percentage of the carrying amount of the bonds. B. less than the constant percentage of the carrying amount of the bonds. C. equal to the constant percentage of the carrying amount of the bonds. D. increasing over the term of the bond issue.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

86. On January 1, 20X7, Tio Rinto Aluminum Co. issued a $500,000, 6%, 8-year bond with interest payable semi-annually at par. The issuance price of the bond and the first period's interest expense are closest to

A B C D

Issue price $500,000 $500,000 $470,000 $470,000

Interest expense $15,000 $30,000 $15,000 $30,000

A. Choice A B. Choice B C. Choice C D. Choice D Interest = $500,000 ´ 3%.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-07 Bonds Issued at Par

87. Which of the following statements about interest is not true? A. The times interest earned ratio gives an indication of a company's ability to meet interest payments as they come due. B. The times interest earned ratio is calculated by dividing the sum of net earnings, interest expense, and income tax expense, by interest expense. C. EBIT can be calculated by adding interest expense and income tax expense to net earnings. D. The higher a company's debt to total assets ratio, the lower the company's times interest earned ratio will be.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

88. The times interest earned ratio is calculated by dividing A. net earnings by interest expense. B. net earnings before income taxes by interest expense. C. net earnings before interest expense by interest expense. D. net earnings before interest expense and income taxes by interest expense.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

89. In 20X4, H Co's times interest earned ratio was 2.51 while T Co's ratio for that year was .80. Which of the following statements is false? A. H Co's ratio appears to provide adequate coverage of interest from its present net earnings. B. Since H Co's is actively pursuing growth through investment in other companies, its ratio may improve once those investments begin to generate additional net earnings. C. T Co's ratio is very low and they present high risk to their creditors and investors. D. H Co.'s ratio shows an extra margin of risk in case profitability deteriorates.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

90. In 20X4, P Co reported net earnings of $1,933 million, interest expense of $395 million and income taxes of $270 million. In 20X3, they reported net earnings of $2,142 million, interest expense of $478 million and income taxes of $818 million. Calculate the times interest earned ratio for 20X4 and 20X3, respectively. A. 5.05 and 4.48 times B. 6.58 and 7.19 times C. 5.73 and 6.19 times D. 6.05 and 5.48 times Calculation: ($1,933 + $395 + $270) ÷ $395 = 6.58; ($2,142 + $478 + $818) ÷ $478 = 7.19.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

91. In 20X4, C Co. reported a times interest earned ratio of 12.33 times while P Co. reported a ratio of 11.07 times. Which of the following statements is false? A. P Co. and C Co. have more than adequate ratios demonstrating their ability to cover interest charges with their earnings levels. B. C Co's ratio is about 11.3% higher than P Co's ratio. C. C Co. is more liquid than P. Co. D. Lenders would be pleased with the ratios of both companies and be willing to lend them money for future expansion.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

92. Tasker Inc. earned a gross profit of $300,000 on sales of $1,200,000 during 20X3. The company also had operating expenses of $180,000. These operating expenses included interest expense of $40,000. The company is subject to an effective tax rate of 30%. What is the company's times interest earned ratio for the year? A. 4 times B. 4.5 times C. 5 times D. 3.2 times Computation of Net Earnings:

Gross Operating Profit: Less: operating expenses Earnings before Interest and Taxes Less: Interest expenses Earnings before taxes Income tax ($120,000 × 30%) Net income

$300,000 140,000 160,000

40,000 120,000 36,000 $84,000

Times Interest Earned Ratio = ($84,000 + $40,000 + $36,000)/$40,000 = 4 times.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

93. Bonds issued at a premium reduce: A. the perceived risk to the bondholder. B. the cost of borrowing. C. the bond value to be shown on the balance sheet. D. the interest payments to be made to the bondholder.

94. The amortization of bond premium by the issuer will do which of the following? A. Decrease interest expense. B. Increase interest expense. C. Have no effect on interest expense. D. Determine the cash paid for interest.

95. If a bond payable is sold (issued) at a premium, the amount of the carrying value (the long-term liability) reported on the subsequent statements of financial position does which of the following? A. Remains constant. B. Decreases each year. C. Increases each year. D. Changes from year to year depending upon the market rate of interest each year.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

96. The amortization of bond premium by the issuer will do which of the following? A. Decrease interest expense. B. Increase interest expense. C. Have no effect on interest expense. D. Determine the cash paid for interest.

97. On December 31, 20X1, Dive Company sold $100,000, ten-year, 8% bonds at 104.5. The bonds were dated January 1, 20X1, and interest is payable each June 30 and December 31. The company uses the straight-line amortization method. The company should report the long-term liability (carrying value) for the bonds on the December 31, 20X1, statement of financial position as which of the following? A. $100,000 B. $103,400 C. $104,000 D. $104,500

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

98. One thousand bonds with a face value of $1,000 each, are sold at 104. The entry to record the issue is

A B C D

Cash Bonds Payable Interest Payable Cash Bonds Payable Cash Bonds Payable Cash Interest Expense Bonds Payable

1,040,000 1,000,000 40,000 961,538 961,538 1,040,000 1,040,000 1,000,000 40,000 1,040,000

A. Choice A B. Choice B C. Choice C D. Choice D

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-11 Bonds Issued at a Premium

99. If bonds have been issued at a premium, then over the life of the bonds the A. carrying amount of the bonds will decrease. B. interest expense will remain unchanged. C. carrying amount of the bonds will increase. D. unamortized discount will increase.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

100. Accurate Numbers, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 20X1, for $102,360 on April 1, 20X1. The bonds pay interest on April 1 and October 1. Straight-line amortization is used by the company. What entry is needed at October 1 for the first interest payment?

Interest expense Premium on bonds payable Cash Interest expense Discount on bonds payable Cash Interest expense Premium on bonds payable Cash Interest expense Cash

5,882 118 6,000 6,118 118 6,000 6,000 118 6,118 6,000 6,000

A. Choice A B. Choice B C. Choice C D. Choice D Calculation Premium on bonds payable ($102,360 - $100,000 = $2,360/10 = $236/2 = $118) Interest Expense = $6,000 - 118 = $5,882.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

101. Vegan's delight foods has a $100,000 bond outstanding with an unamortized discount of $5,679. The company has decided to retire the bonds for a cost of $102,000. The journal entry to record the retirement of the banks will include which of the following? A. Loss on redemption of bonds, $5,679. B. Loss on redemption of bonds, $7,679 C. Gain on redemption of bonds, $5,679. D. Gain on redemption of bonds, $7,679 $102,000 - ($100,000 - $5,769) = $7,679 loss on bond redemption.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

102. A corporation recently retired $1,000,000 worth of bonds early for $997,500. They reported a gain related to the retirement of the bonds of $24,250. What was the unamortized bond discount or premium at the time of retirement? A. $24,250 premium B. $26,750 premium C. $21,750 discount D. $21,750 premium Proceeds + gain = book value of the debt. BV - face value = premium or discount. $997,500 + $24,250 = $1,021,750; $1,021,750 - $1,000,000 = $21,750 premium.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

10-35

Chapter 10 - Reporting and Interpreting Non-current Liabilities

103. A $100,000 bond was retired at 96 when the carrying amount of the bond was $105,000. The entry to record the retirement would include a: A. gain on bond redemption of $9,000. B. loss on bond redemption of $4,000. C. loss on bond redemption of $8,000. D. gain on bond redemption of $4,000. Redemption amount $100,000 ´ 0.96 = $96,000; Carrying value = 105,000; Gain on bond redemption = $105,000 - $96,000 = $9,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

104. A $500,000 bond is retired at 97 when the carrying amount of the bond is $480,000. The entry to record the retirement would include a: A. $20,000 loss. B. $5,000 gain. C. $5,000 loss. D. $2,000 gain. Redemption amount $500,000 ´ 0.97 = $485,000; Carrying value = $480,000; Loss on bond redemption = $480,000 - $485,000 = $5,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

105. A company decides to redeem its bonds before maturity for 101. The face value of the bonds is $5,000,000 and the carrying amount on date of redemption is $4,945,000. The journal entry to record this transaction is: A. Please see the following information:

Bond s Paya ble Loss on Bond Rede mptio n Cash

4,945 ,000

105,0 00

5,050 ,000

B. Please see the following information:

Bond s Paya ble Loss on Bond Rede mpti on Cash

5,000 ,000

50,00 0

5,050 ,000

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

C. Please see the following information:

Bond s Paya ble Loss on Bond Rede mpti on Cash

4,945 ,000

55,00 0

5,00, 000

D. Please see the following information:

Bon 5,05 ds 0,00 Pay 0 able Cas h

5,05 0,00 0

Calculation: Loss on Bond Redemption: Carrying amount - Redemption amount ($4,945,000) - ($5,000,000 ´ 101%) Loss on Redemption: $105,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

10-38

Chapter 10 - Reporting and Interpreting Non-current Liabilities

106. A $100,000 bond was retired at 95 when the carrying amount of the bond was $103,000. The entry to record the retirement would include a: A. gain on bond redemption of $8,000. B. loss on bond redemption of $3,000. C. loss on bond redemption of $8,000. D. gain on bond redemption of $3,000. Calculation: $95,000 ($100,000 ´ 95%) - ($103,000) = $8,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

107. A corporation issues $100,000, 10%, 5-year bonds on January 1, 20X4 for $108,111, at a price to yield 8%. Interest is paid semi-annually on January 1 and July 1. The amount of premium amortized on July 1, 20X4 is A. $8,649 B. $5,000 C. $676 D. $4,324

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

108. If there is a loss on bonds redeemed early, it is A. debited directly to Retained Earnings. B. reported as "Other Expense" on the statement of earnings. C. reported as part of earnings from operations on the statement of earnings. D. debited to Interest Expense, as a cost of financing.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

109. A ten-year bond was issued in 20X4 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 20X6, the carrying value of the bond was less than the call price. The amount of bond liability removed from the accounts in 20X6 would be the A. maturity value. B. face amount plus unamortized discount. C. call price. D. carrying value.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

110. Which of the following is a reason a company would prefer an operating lease over purchasing an asset? A. The company's ability to borrow increases due to larger assets. B. The company benefits from the increase in value of the assets. C. The risk of loss from obsolescence is reduced. D. The company does not have to depreciate the asset.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-06 Describe other non-current liabilities. Topic: 10-17 Lease Liabilities

111. Piccolo Airways purchase or leases its entire aircraft fleet. Since Alamo already has too much debt, they would prefer off-balance-sheet financing, which can be achieved using: A. Finance leases B. Operating leases C. Capital leases D. Convertible bonds

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 10-06 Describe other non-current liabilities. Topic: 10-17 Lease Liabilities

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

112. If a company makes extensive use of operating leases to finance assets, what is the effect on the debt-to-equity ratio? A. The debt-to-equity ratio would not be affected. B. The effect depends on whether the ratio is above 1 or not. C. The debt-to-equity ratio would be overstated. D. The debt-to-equity ratio would be understated.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-06 Describe other non-current liabilities. Topic: 10-17 Lease Liabilities

113. Which of the following criteria would indicate that a lease should be accounted for as a finance lease? A. The present value of the minimum lease payments is $93,500, while the fair market value of the leased asset is $100,000. B. The lease is for real property. C. The lease asset is guaranteed to revert to the lessor at the end of the lease term. D. The lease term is for four years, while the asset's useful life is ten years.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-06 Describe other non-current liabilities. Topic: 10-17 Lease Liabilities

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

114. What is the effect of classifying a lease as an operating lease, as opposed to as a finance lease, on the debt to equity ratio and the times-interest-earned ratio?

A B C D

Debt to equity ratio Overstated Overstated Understated Understated

Times-interest-earned ratio Overstated Understated Overstated Understated

A. Choice A B. Choice B C. Choice C D. Choice D

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-06 Describe other non-current liabilities. Topic: 10-17 Lease Liabilities

115. Pleasant Company has established a pension plan for its employees that operates as follows: Each year, Pleasant Company places a fixed dollar amount in a pension fund for each employee. The funds are then invested. Upon retirement, each employee is entitled to the cash value of the funds that have been invested in his/her name. This arrangement is an example of which of the following? A. Defined benefit program. B. Defined contribution program. C. Contingent program. D. Deferred timing program.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-06 Describe other non-current liabilities. Topic: 10-16 Other Non-Current Liabilities

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

116. In 20X6, General Dynamics (GD) had a Prepaid Pension Asset of $12.4 billion, total assets of $495 billion, and net income of $13.7 billion. This means that A. GD's pension plan was underfunded by $12.4 billion. B. GD recorded a nonrecurring item on the income statement for $12.4 billion. C. GD's pension plan was overfunded by $12.4 billion. D. GD had extraordinary liabilities of $12.4 billion.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-06 Describe other non-current liabilities. Topic: 10-16 Other Non-Current Liabilities

117. An accountant is reviewing the financial statements of a company and notes that the company reports a pension liability on its balance sheet. What does the pension liability represent? A. The increase in the pension obligation that was earned this year. B. The present value of all future pension obligations. C. The difference between the pension plan obligations and the pension plan assets. D. The amount of this year's pension expense that has not been paid yet.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 10-06 Describe other non-current liabilities. Topic: 10-16 Other Non-Current Liabilities

118. A company with a defined contribution pension plan is best described as being A. committed to specific levels of contributions to the pension plan of the employee. B. committed to making cash payments for pensions when the employee actually retires. C. committed to specific retiree benefit levels at retirement. D. committed to early retirement for all employees.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 10-06 Describe other non-current liabilities. Topic: 10-16 Other Non-Current Liabilities

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

119. In 2019, Wall Company had total liabilities of $22,704 million and total assets of $43,679 million. In 2018, they had total liabilities of $21,990 million and total assets of $41,378 million. Calculate their debt to equity ratio for 2019 and 2018, respectively. (Round final answers to two decimal places) A. 0.48 and 0.47 B. 0.52 and 0.53 C. 0.92 and 0.88 D. 1.08 and 1.13 Calculation: $22,704/($43,679 - $22,704) = 1.08; $21,990/($41,378 - $21,990) = 1.13.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-07 Compute and interpret the debt-to-equity ratio. Topic: 10-16 Other Non-Current Liabilities

120. Milford Inc. has a debt-to-equity ratio of 0.80. It has total shareholders' equity of $2.5 million and current liabilities of $750,000. How much long-term debt is outstanding? A. $3,125,000 B. $1,250,000 C. $2,375,000 D. $2,100,000 0.80 ´ $2,500,000 = $2,000,000 total debt less CL $750,000 = $1,250,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-07 Compute and interpret the debt-to-equity ratio. Topic: 10-16 Other Non-Current Liabilities

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

121. Bullseye is a large retailer. Its debt-to-equity ratio last year was 0.82 and its interestcoverage ratio was 20.5. The industry averages for these two ratios are 0.68 and 24.59, respectively. Based on that information, which of the following statements is true? A. Bullseye can pay its interest expense more easily than the average in the industry. B. Bullseye is less risky than average for the industry. C. Bullseye has more debt in its capital structure than the average for the industry. D. Bullseye has less debt in its capital structure than the average for the industry.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-07 Compute and interpret the debt-to-equity ratio. Topic: 10-16 Other Non-Current Liabilities

122. Which of the following ratios can be used to evaluate an entity's capital structure? A. Current ratio B. Debt-to-equity C. Return-on-assets ratio D. Times interest earned ratio

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-07 Compute and interpret the debt-to-equity ratio. Topic: 10-16 Other Non-Current Liabilities

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

123. A financial analyst is evaluating the solvency and liquidity of Flagstaff Manufacturing and has collected the following data:

20X7 Total debt Total equity

20X6 $2,000 $4,000

20X5 $1,900 $4,500

$1,750 $5,000

What would the analyst be most likely to conclude? A. The company is becoming increasingly less solvent as evidenced by the increase in its debt to equity ratio from 0.35 in 20X5 to 0.50 in 20X7. B. The company is becoming increasingly less liquid as evidenced by the increase in its debt to equity ratio from 0.35 in 20X5 to 0.50 in 20X7. C. The company is becoming increasingly more solvent as evidenced by the increase in its debt to equity ratio from 0.35 in 20X5 to 0.50 in 20X7. D. The company is becoming increasingly more liquid as evidenced by the increase in its debt to equity ratio from 0.35 in 20X5 to 0.50 in 20X7. 20X5 20X4 20X3

2,000/4,000 = 0.5000 1,900/4,500 = 0.4222 1,750/5,000 = 0.3500

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-07 Compute and interpret the debt-to-equity ratio. Topic: 10-16 Other Non-Current Liabilities

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

124. A creditor would most likely consider a decrease in which of the following ratios to be positive news? A. Times interest earned B. Current ratio C. Debt to equity ratio D. Inventory turnover

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-07 Compute and interpret the debt-to-equity ratio. Topic: 10-16 Other Non-Current Liabilities

125. Compared to using a finance lease, a lessee that makes use of an operating lease will most likely report higher: A. Bank debt B. Rent or lease expense C. Current ratio D. Cash flows from financing activities

126. Which of the following statements about cash flows is true? A. The corporation will have cash inflow when bonds are issued for an amount equal to, greater than, or less than the par value of the bonds. B. The corporation will have to pay cash to bond investors when those investors demand to call the bonds. C. The corporation will have an outflow of cash connected to an investing activity when interest is paid to bond investors. D. An outflow of cash when convertible bonds are converted is a financing activity.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 10-08 Explain how financing activities are reported on the statement of cash flows. Topic: 10-16 Other Non-Current Liabilities

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

127. Which of the following is true? A. An outflow of cash for interest payments is an investing activity. B. An outflow of cash when convertible bonds are converted is an investing activity. C. An outflow of cash when callable bonds are recalled by the issuer is a financing activity. D. Payment of interest is an investing activity since we would not have interest unless we borrowed money or sold bonds to the public.

128. A company wants to maintain its current debt/equity ratio. Which of the following relationships would most likely occur on the cash flow statement? A. Cash from operations would be equal to any debt paid off during the year. B. New borrowings would replace any debt paid off. C. New borrowings would be less than cash from operations for the year. D. Cash from operations would be equal to cash from financing activities for the year.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

129. Madison Co had the following activity during 20X7:

Face value of bond issuance Amortization of bond premium Unamortized premium on bond issue Payment of long-term note payable Dividends paid to shareholders Sale of shares Gain on the sale of equipment

$200,000 2,000 12,000 45,000 25,000 125,000 75,000

What was the cash flow from financing activities? A. $255,000 B. $267,000 C. $300,000 D. $269,000 Proceeds from bond issuance = ($200,000 + $2,000 + $12,000) = $214,000 + Sale of shares $125,000 - Payment of dividends $25,000 - Repayment of note $45,000 = $269,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-08 Explain how financing activities are reported on the statement of cash flows. Topic: 10-16 Other Non-Current Liabilities

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

130. A 6% five-year bond was issued at $918.89. The face value and yield to maturity for the bond are

Face value A B C D

$918.89 $918.89 $1,000.00 $1,000.00

A. Choice A B. Choice B C. Choice C D. Choice D

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-06 Reporting Bond Transactions

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Yield to maturity greater than 6%. less than 6%. greater than 6%. less than 6%.

Chapter 10 - Reporting and Interpreting Non-current Liabilities

131. On January 1, 2018 Precious Metals Ltd issued a $100,000, 6%, 5-year bond for $91,889 to yield 8%. Interest is payable semi-annually. The interest expense and interest payable for the first year are closest to: (Do not round intermediate calculations. Round final answer to nearest whole dollars.)

A B C D

Interest expense $3,675 $7351 $7,378 $7,351

A. Choice A B. Choice B C. Choice C D. Choice D Interest payable = $100,000 × 3% = $3,000 × 2 = $6,000 Interest expense1 = $91,889 × 4% = $3,675 Interest expense2 = ($91,889 + $676) × 4% = $3,702 $3,675 + $3,702 = $7,378. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-06 Reporting Bond Transactions

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Interest payable $3,000 $6,000 $6,000 $8,000

Chapter 10 - Reporting and Interpreting Non-current Liabilities

132. On January 1, 20X6, Malenfant Ltd. sold five year, 12% bonds with a face value of $500,000. Interest will be paid semi-annually on June 30 and December 31. The bonds were sold for $538,500 to yield 10%. Using the effective interest method of amortization of bond discount or premium, interest expense for 20X6 is A. $53,850 B. $50,000 C. $53,696 D. $60,000 $538,500 ´ 5% = $26,925 - $30,000 = $3,075. $538,500 - $3,075 = $535,425 ´ 5% = $26,771 + $26,925 = $53,696

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-06 Reporting Bond Transactions

133. Manu Corporation issued $200,000 of 4% five-year bonds for proceeds of $192,330. The market interest rate is 6%. Interest is paid semi-annually. How much bond interest expense is recorded on the first interest date? A. $4,000 B. $5,770 C. $6,000 D. $3,847 Computation of Bond Interest Expense = $192,330 ´ 6% ´ (6/12) = $5,770 (rounded off).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-06 Reporting Bond Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

134. On January 1, 20X1, Winston Corporation sold a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Assuming effective-interest amortization is used, the interest expense on the 20X1 income statement would be which of the following amounts (to the nearest dollar)? A. $700 B. $773 C. $883 D. $1,547 Calculation: $9,668 ´ 8% = $773.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-06 Reporting Bond Transactions

135. On July 1, 20X2, Wild World Inc. Issued 300, $1,000, ten-year, 7% coupon bonds at 101. The bonds were dated July 1, 20X2, and semi-annual interest will be paid each December 31 and June 30. Wild World uses straight-line amortization. What is the bond liability that would be reported on the statement of financial position at December 31, 20X2? A. $300,000 B. $302,700 C. $302,850 D. $303,000 Calculation: [($300,000 ´ 101%) - $300,000] ÷ 20 = $150; $303,000 - $150 = $302,850.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-18 Appendix 10A: Reporting Interest Expense on Bonds by Using the Straight-Line Amortization Method

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

136. On November 1, 20X1, Duval Company issued 300, $1,000, ten-year, 7% bonds at 97. The bonds were dated November 1, 20X1, and interest is payable each November 1 and May 1. What would be the amount of discount amortization at each semi-annual interest date (assume straight-line amortization)? A. $50 B. $900 C. $450 D. $600 Calculation: [$300,000 - ($300,000 ´ 97%)] ÷ 20 = $450.

137. On January 1, 20X1, Washer Company sold (issued) 600, $1,000, five-year, 8% bonds at 95. The bonds were dated January 1, 20X1, and interest is payable each June 30 and December 31. The company uses the straight-line method of amortization. What is the amount of the net liability for bonds payable that would be reported on the December 31, 20X1, statement of financial position? A. $573,000 B. $576,000 C. $597,000 D. $600,000 Calculation: ($600,000 ´ 95%) + ($30,000 ÷ 5) = $576,000.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

138. If bonds are initially sold at a discount and the straight-line method of depreciation is used, interest expense in the earlier years will be A. less than it would have been had the effective interest method of amortization been used. B. higher than it would have been had the effective interest method of amortization been used. C. less than the stated rate of interest. D. the same as it would have been had the effective interest method of amortization been used.

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

Short Answer Questions 139. Match the definitions with the appropriate terms. Definition A. The issue price of the bond. B. A cash fund set up to retire bonds. C. The theoretically correct approach to amortizing bond discount or premium. D. Involves repayment of the bond in instalments. E. The bond contract containing legal provisions relating to the bond. F. None of the above. Term ____ 1. Equipment trust bond ____ 2. Effective-interest amortization method ____ 3. Current cash equivalent amount ____ 4. Serial bond ____ 5. Ordinary payment bond ____ 6. Debenture ____ 7. Bond sinking fund ____ 8. Straight-line amortization method ____ 9. Indenture ____10. Collateral (1) F, (2) C, (3) A, (4) D, (5) F, (6) F, (7) B, (8) F, (9) E, (10) F

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 10-01 Describe the characteristics of long-term notes and bonds payable. Topic: 10-01 Characteristics of Long-Term Notes and Bonds Payable

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

140. Match the way a bond will sell with the situations given. Bond will sell for A. Par B. A discount C. A premium D. None of the above Situation ____ 1. Bond sells at 108. ____ 2. Bond sells at 93. ____ 3. Bond sells at 100. ____ 4. The effective rate is greater than the stated rate. ____ 5. The stated rate equals the effective rate. ____ 6. The stated rate exceeds the effective rate. (1) C, (2) B, (3) A, (4) B, (5) A, (6) C

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-07 Bonds Issued at Par Topic: 10-09 Bonds Issued at a Discount Topic: 10-11 Bonds Issued at a Premium

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

141. Match the type of bond with the appropriate description. Type of Bond A. Debentures B. Secured bonds C. Ordinary bonds D. Serial bonds E. Callable bonds F. Redeemable bonds G. Convertible bonds H. Registered bonds I. Coupon bonds J. Indentures Description ____ 1. When the bond interest date approaches, the investor detaches a form from the bond, signs it, and mails it to the issuing company. ____ 2. Bonds that can be exchanged for other securities of the issuer, at the option of the investor. ____ 3. There is no pledge of assets, or mortgage, as a guarantee of payment of the bonds at maturity. ____ 4. Bonds that may be called for early retirement at the option of the issuer. ____ 5. The payment of the principal as a single sum at a specified date. ____ 6. Payment of bond interest is made only to the investor currently on the records of the issuer. ____ 7. Bonds that may be turned in for early retirement at the option of the investor. ____ 8. Bonds that include a mortgage or pledge of specific assets as a guarantee of repayment at maturity. (1) I, (2) G, (3) A, (4) E, (5) C, (6) H, (7) F, (8) B

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

142. On March 1, 20X1, Warner Corporation, a calendar year company, issued 40 of its $1,000, 8%, five-year bonds at par. The bonds were dated March 1, 20X1, and the first interest payment will be on February 28, 20X2. The accounting period ends December 31. Part A: Complete the journal entry grid for each of the following dates (round to the nearest dollar)

Accounts

March 1, 20X6 Debit Credit

December 31, 20X6 Debit Credit

February 28, 20X7 Debit Credit

Cash Bonds Payable Interest Payable Interest Expense Other Accounts

Part B: Discuss why an entry is needed on December 31, 20X6. Part A: Complete the journal entry grid for each of the following dates (round to the nearest dollar)

Accounts Cash Bonds Payable Interest Payable Interest Expense Other Accounts

March 1, 20X6 Debit Credit 40,000 (a) 40,000 (a)

December 31, 20X6 Debit Credit

2,667 (b) 2,667 (b)

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February 28, 20X7 Debit Credit 3,200 (c) 2,667 (c) 533 (c)

Chapter 10 - Reporting and Interpreting Non-current Liabilities

(a) Sold at par, $40,000 (b) $40,000 ´ 8% ´ 10/12 = $2,667 (c) Cash paid: $40,000 ´ 8% = $3,200 Interest payable (per b) = $2,667 Interest expense ($40,000 ´ 8% ´ 2/12) = $533 Part B: Warner Corporation has borrowed money via its bonds from March 1 through December 31, 20X6. It has, therefore, incurred an expense for the use of money for ten months. To reflect this interest expense ($2,667) in the proper accounting period, an accrual adjusting entry is required.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-06 Reporting Bond Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

143. On April 1, 20X2, Larel Corporation issued $40,000, 9%, ten-year bonds payable at 108 that were dated April 1, 20X2. Interest is payable each March 31 and September 30. (a) Give the entry to record the issuance of the bonds on April 1, 20X2 (b) Give the entry to record the first interest payment on September 30, 20X2. Use straightline amortization (c) Give the adjusting entry required on December 31, 20X2, the end of the annual accounting period. Use straight-line amortization (a) Cash (40,000 × 1.08) Bond premium ($43,200 $40,000) Bonds payable

43,200 3,200 40,000

(b) Bond interest expense Bond premium ($3,200 × 6/12) Cash

1,640 160 1,800

820 80 900

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

144. On January 1, 20X2, Dole Corporation sold (issued) 400 of its $1,000, ten-year, 9% bonds. The bonds were dated January 1, 20X2, and interest is paid semi-annually each June 30 and December 31. The bonds sold at 99. Part A: Give the entry to record the sale of the bonds on January 1, 20X2 Part B: Were the bonds sold at par, at a premium or at a discount and how did you arrive at your answer? Part A:

Cash ($400,000 × .99) Discount on bonds payable ($400,000 - $396,000) Bonds payable

396,000 4,000 400,000

Part B: The bonds were sold at a discount. They were sold at 99 which means that 99% of their face or par value. Since 99$% is less than 100%, they were sold at less than par or at a discount.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

145. On June 30, 20X1, Reagan Corporation sold (issued) a $1,000, ten-year, 8% bonds payable (interest payable each June 30 and December 31). For the three assumptions below, complete the following schedule assuming the accounting year ends December 31, and straight-line depreciation is used:

Transaction a. b. c.

Sale @ 96 Assumption 2

Sale @ 104 Assumption 3

Sale @ 96 Assumption 2

Sale @ 104 Assumption 3

Cash received Interest expense for 20X1 Net bond carrying value on the December 31, 20X2 balance sheet

Please review the following information: a. b.

Sale @ 100 Assumption 1

Transaction Cash received Interest expense for 20X1 Net bond carrying value on the December 31, 20X2 balance sheet

$1,000 40

$960 42

$1,040 38

1,000

966

1,034

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-05 Report the early retirement of bonds. Topic: 10-15 Early Retirement of Debt

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

146. Lamar Company authorized a $500,000, five-year, 12% bond issue dated October 1, 20X1, with semi-annual interest to be paid each September 30 and March 31. On October 1, 20X1, the bonds were issued (sold) for $497,340. (a) Give the entry to record the sale of the bonds. (b) It is December 31, 20X1, the end of the accounting period. Give the required adjusting entry using straight-line amortization (c) Was the bond sold at par, at a discount or at a premium? (d) Will interest expense be greater than or less than the cash payments for interest? (a) Cash Discount on bonds payable Bonds payable

497,340 2,660 500,000

(b) Interest expense Discount on bonds payable Interest payable

15,133 133 15,000

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

Interest Payable: $500,000 × 12% × 3/12 = Discount amortization: $2,660 × 3/60 = Interest expense

$15,000 133 15,133

147. On March 1, 20X1, Allen, Inc., issued a $1,000, 8%, five-year bond payable for $1,060. The bond was dated on March 1, 20X1, and interest is payable each February 28 and August 31. You are to complete the following entries: (round to the nearest dollar.)

(a)

(b)

(c)

March 1, 20X1 - Date of issuance: Cash Bonds payable Premium on bonds payable August 31, 20X1 - Interest payment date (assume straight-line amortization): Bond interest expense Premium on bonds payable Cash December 31, 20X1 - Adjusting entry (end of annual accounting period): Bond interest expense Premium on bonds payable Bond interest payable

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

(d) Was the bond issued at par, at a premium, or at a discount? (e) What is the carrying value of book value of the bond on December 31, 20X1? (f) Where in the financial statements does the carrying value of the bond appear (be specific)? (g) On what date does the bond issue mature? Please March 1, 20X1 - Date of issuance: review the following information: (a)

(b)

(c)

Cash Bonds payable Premium on bonds payable August 31, 20X1 - Interest payment date (assume straight-line amortization): Bond interest expense Premium on bonds payable Cash December 31, 20X1 - Adjusting entry (end of annual accounting period): Bond interest expense Premium on bonds payable Bond interest payable

(d) Premium. (e) $1,050 ($1,000 + 60 - 6 - 4) (f) On the balance sheet, in the long-term liabilities section. (g) February 28, 20X6 (or March 1, 20X6).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-06 Reporting Bond Transactions

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1,060 1,000 60

34 6 40

23 4 27

Chapter 10 - Reporting and Interpreting Non-current Liabilities

148. On October 1, 20X1, Britt Company issued a $5,000, 6%, bond payable. The interest is payable annually each October 1 and the bond matures in five years. The annual accounting period for the company ends December 31. Complete the following entries at the date specified under three different assumptions as to the issue price. Use straight-line amortization.

@ par Entry Record Issuance: October 1, 20X1 Cash Bond Discount Bond Premium Bonds Payable Record adjusting entry: December 31, 20X1 Bond interest expense Bond discount Bond premium Bond interest payable Record Interest Payment: October 1, 20X2 Bond interest

Debit

Credit

Assumed Issue Price @ 94 Debit Credit

10-67

@ 106 Debit Credit

Chapter 10 - Reporting and Interpreting Non-current Liabilities

expense Bond interest payable Bond discount Bond premium Cash

10-68

Chapter 10 - Reporting and Interpreting Non-current Liabilities

Please review the following information:

Entry

Assumed Issue Price @ 94

@ par Debit Record Issuance: October 1, 20X1 Cash Bond Discount

Credit

Debit

5,000

@ 106

Credit

Debit

4,700

Credit

5,300

300 Bond Premium Bonds Payable Record adjusting entry: December 31, 20X1 Bond interest expense Bond discount Bond premium Bond interest payable Record Interest Payment: October 1, 20X2 Bond interest expense Bond interest payable Bond discount Bond premium Cash

5,000

300 5,000

5,000

60 15 15

225

270

180

75 45 45

300

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300

Chapter 10 - Reporting and Interpreting Non-current Liabilities

149. Millwood Company prepared a bond issue dated January 1, 20X1. On January 1, 20X1, the company sold $100,000 of its par value bonds at 103. The bonds mature in thirty years and have a stated rate of interest of 8% per year. Interest is payable annually on December 31. Straight-line amortization is used (round to the nearest dollar). (a) Give the entry to record the sale of bonds on January 1, 20X1: (b) Give the entry to record interest expense at December 31, 20X1 (end of the annual accounting period) (c) Show how the bonds would be reported on the statement of financial position of Millwood Company dated December 31, 20X3 (a) Cash Bonds Payable Premium on bonds payable

103,000 100,000 3,000

(b) Interest expense Premium on bonds payable ($3,000 × 1/30) Cash ($100,000 × 8%)

7,900 100 8,000

100,000 2,700

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102,700

Chapter 10 - Reporting and Interpreting Non-current Liabilities

*$3,00 - (3,000 ´ 3/30)

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-09 Bonds Issued at a Discount

150. Roy Company sold the following ten-year bonds payable on January 1, 20X1: $100,000 maturity value, 5% interest payable annually on each December 31. The bonds were dated January 1, 20X1 and the accounting period ends December 31. The bonds were sold at 98. (a) Fill in each blank to the right (assume straight-line amortization)

Transaction 1. Cash inflow at date of issuance Cash outflow under 10-year period: 2. Principal 3. Interest 4. Total interest 5. Stated interest rate 6. Interest expense for 20X2 Balance Sheet at December 31, 20X2: 7. Bonds payable 8. Unamortized amount 9. Net liability

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Amount $ $ $ $ $ $ $ $ $

Chapter 10 - Reporting and Interpreting Non-current Liabilities

(b) Assuming the account period ends on June 30, give the adjusting entry related to interest expense for X (a) Transaction

Amount

Cash inflow at date of issuance Cash outflow under 10-year period: 2. Principal 3. Interest 4. Total interest 5. Stated interest rate 6. Interest expense for 20X2 Statement of Financial Position at December 31, 20X2: 7. Bonds payable 8. Unamortized amount 9. Net liability

$98,000 $100,000 $50,000 $52,000 5% $5,200 $100,000 $1,600 $98,400

(b) Interest Expense (for six months) Discount on bonds payable ($2,000/10 × 6/12) Interest payable ($100,000 × 5% × 6/12)

2,600 100 2,500

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

151. Consider the following statement: "Issuing bonds at a discount is bad for the issuing corporation." Required: Discuss the statement above and comment on its validity. The issuance of bonds at a discount is not bad nor is the issuance of bonds at a premium good. Bonds are issued at a price based on the market rate of interest. When bonds are issued at a discount, the market rate exceeds the stated rate. When bonds are issued at a premium, the stated rate exceeds the market rate. The price at which bonds are sold simply adjusts the selling price to yield the market rate to the bondholders.

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Topic: 10-09 Bonds Issued at a Discount

152. The following information was taken from the statement of earnings of Aventura Company for the years 2017 through 2019 (in millions):

2019 Interest expense Income taxes Profit

2018 $612 1,104 1,300

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2017 $62 1,397 1,850

$693 1,421 1,966

Chapter 10 - Reporting and Interpreting Non-current Liabilities

(1) Calculate the times interest earned ratio for 2017 through 20192. (2) Comment on the sufficiency of the ratio. (1) 2017, 4.93 times, 2018, 5.9 times, 2019, 5.89 times. (2) The ratio was constant between 20X17 and 2018; however, it did drop significantly in 2019 primarily caused by the decrease in profit. The level of interest expense has dropped over the three years but the profit has declined at a faster rate than the decrease in interest in 2019. Overall, even in 2019, the company still has almost five dollars of profit coverage for every dollar of interest charges incurred so they do not appear to be having difficulty generating sufficient profit coverage for interest charges.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-11 Bonds Issued at a Premium

153. On July 1, 20X1, GAAP Corporation sold (issued) $100,000 of its ten-year, 6% bonds payable at 98. The bonds were dated July 1, 20X1, and interest is paid each June 30, and December 31. (a) Give the entry to record the sale of the bonds (b) Give the entry to record the first interest payment. Assume straight-line amortization (a) July 1, 20X1

Cash ($100,000 × .98) Discount on bonds payable Bonds payable

98,000 2,000 100,000

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

(b) December 31, 20X1

Bond Interest expense ($3,000 + 100) Discount on bonds payable Cash ($100,000 × 6% × 6/12)

3,100 100 3,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-09 Bonds Issued at a Discount

154. Bush Company authorized $150,000 of 5-year bonds dated January 1, 20X1. The stated rate of interest was 14%, payable each June 30 and December 31. The bonds were issued on January 1, 20X1, when the market interest rate was 12%. Assume effective-interest amortization. (The present value factor for $1 at 6% for 10 periods is 0.5584, for $1 at 7% for 10 periods is 0.5083, for $1 at 14% for 5 periods is 0.5194, and for $1 at 12% for five periods is 0.5674. The present value of an annuity of $1 for 10 periods at 6% is 7.3601, for 10 periods at 7% is 7.0236, for 5 periods at 6% is 4.2124, and for 5 periods at 7% is 4.1002.) Round to the nearest dollar. (a) What would be the amount of premium amortization for June 30, 20X1? (b) What would be the amount of premium amortization for December 31, 20X1? (c) What would be the amount of the interest payment on June 30, 20X1? (d) What would be the amount of the interest payment on December 31, 20X1? (a) $838 (b) $888 (c) $10,500 (d) $10,500 Computations

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

Issue price: $150,000 × factor [10; i - 6% (Table A-2 = 0.5584)] (150,000 × 14%/2) = $10,500 × factor [10; i 6 (Table A-4 = 7.3601)] Issue Price:

$83,760 $77,281 $161,041

Amortization Schedule

Date

Cash interest ($150,000 × 7%)

1/1/20X1 6/30/20X1

$10,500

12/31/20X1

$10,500

Interest expense $161,041 × 6% = $9,662 $160,203 × 6% = $9,612

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-06 Reporting Bond Transactions

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Effective Interest Amortization

Net Liability

$838

$161,041 $160,203

$888

$159,315

Chapter 10 - Reporting and Interpreting Non-current Liabilities

155. Austin Corporation sold its $1,000,000, 7%, ten-year bonds to the public on January 1, 20X1. The bonds pay interest annually, beginning on December 31, 20X1. Austin received $1,153,420 in cash at the issuance of the bonds. The market rate of interest when the bonds were sold was 5% (a) Compute the amount of the premium that Austin Corporation should amortize on December 31, 20X1, assuming the "effective-interest" method is used. $_______________ (b) Compute the amount of the premium that Austin Corporation should amortize on December 31, 20X1, assuming the "straight-line" method is used. $_______________ (c) Which method above is theoretically the better to use for amortizing a bond premium? (a) ($1,000,000 ´ 7% = $70,000) - ($1,153,420 ´ 5% = $57,671) = $12,329 (b) $153,420/10 = $15,342. (c) Effective-interest method.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-06 Reporting Bond Transactions

156. Webber Company reported the following information for 20X2 (in millions). Identify where these items would be classified on the statement of cash flows (operating, investing, or financing) and whether they would be added or deducted in those sections.

20X2 Interest payments Proceeds from the issuance of notes Borrowings under a revolving line of credit Debt retirements Gain on early retirement of debt

$585 $3,833 $462 $2,794 $350

Please review the following information:

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

Interest payments Proceeds from the issuance of notes Borrowings under a revolving line of credit Debt retirements Gain on early retirement of debt

Type of activity Operating Financing

Effect +/+

Financing

Financing Operating

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-08 Explain how financing activities are reported on the statement of cash flows. Topic: 10-16 Other Non-Current Liabilities

157. On November 1, 20X1, Rossy Co. purchased $100,000, 9%, ten-year bonds of Bossy Corporation at a cost of $100,000 as a held-to-maturity investment. The bonds pay interest semi-annually each April 30 and October 31. Give the journal entries required for the following dates: November 1, 20X1 December 31, 20X1 (End of account period) April 30, 20X2 November 1, 20X1

Held-to-maturity investment Cash

100,000 100,000

December 31, 20X1 (End of account period)

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

Bond interest receivable Revenue from investment

1,500 1,500

April 30, 20X2 (Assuming no reversing entry on January 1, 20X2)

Cash ($100,000 × 9% × 6/12) Bond interest receivable Revenue from interest

4,500 1,500 3,000

158. As a held-to-maturity investment, Jones Company purchased a $1,000, 7% bond of Company Y on January 1, 20X1. The interest is paid each December 31 and the bonds mature in five years from the acquisition date. Give the journal entry to record the acquisition of the bond under each of the following three assumptions. The bond sold at par The bond sold at 103: The bond sold at 97: At par:

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

Long term investment Cash

1,000 1,000

At 103:

Long term investment Cash

1,030 1,030

At 97:

Long term investment Cash

970 970

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-03 Report bonds payable and interest expense for bonds sold at par, at a discount, or at a premium. Learning Objective: 10-04 Compute and interpret the times interest earned ratio. Topic: 10-07 Bonds Issued at Par Topic: 10-09 Bonds Issued at a Discount Topic: 10-11 Bonds Issued at a Premium

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

159. Marie is considering several possible investment alternatives.

Option A Option B Option C

Marie could receive $10,000 today Marie could receive $3,000 at the end of each year for four years Marie could receive $15,000 five years from now

Required: 1. Assuming Marie can earn 8% return which of the options would she prefer? 2 Option A Option B Option C

Present value $10,000 The present value is $3,000 × 3.3121 (present value of an annuity; 4 periods at 8%) or $9,936.30 The present value is $15,000 × 0.6806 (present value of $1; five periods at 8%) or $10,209

Therefore the best option is C

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-01 Describe the characteristics of long-term notes and bonds payable. Topic: 10-01 Characteristics of Long-Term Notes and Bonds Payable

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

160. Note to the instructor: Present and future value tables could be used for this question, but they are not required for its solution. Meade Company has accumulated cash in a fund to use for future expansion. The following accumulation schedule for the fund was prepared:

Date 12/31/20X1 12/31/20X2 12/31/20X3 12/31/20X4

? $4,811 4,811 4,811 4,811

? $-0433 905 1,419

$4,811 10,055 15,771 22,001

Required: Refer to the schedule above and respond to the following questions by entering the answers in the blanks to right.

A. What was the fund's goal in dollars? B. What was the annual contribution to the fund? C. What interest rate was earned? D. What amount interest was earned in 20X1: 20X3: E. Give the entry on 12/31/20X2:

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

A. $22,001 B. $4,811 C. $433/$4811 = 9% D. 20X1, -0-, 20X3, $905 E. Expansion fund Interest revenue Cash

5,244 433 4,811

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-06 Reporting Bond Transactions

10-83

Chapter 10 - Reporting and Interpreting Non-current Liabilities

161. Watson Company purchased a truck that cost $17,000. The company signed a $17,000 note payable that specified four equal annual payments (at each year-end), each of which includes a payment on the principal and interest on the unpaid balance at 10% per annum. A. Compute the amount of each equal payment (round to the nearest dollar). B. Give the entry to record the purchase of the truck. C. Give the entry to record the first annual payment on the note. D. Will the interest paid with the first annual payment be more or less than the interest paid with the second annual payment? Explain your answer. A. $17,000/3.1699 (present value of annuity) = $5,363

B. Truck Note Payable C. Note Payable Interest Expense Cash

17,000 17,000 3,663 1,700 5,363

D. The interest paid on the first installment will be more than the interest on the second payment because the principal is lower

Payment

Amount

$5,363

Interest Reduction or Expense Principal $17,000 × 10% $5,363 - $1,700 = = $1,700 $3,663 $13,337 × 10% $5,363 - $1,334 = = $1,334 $4,029

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

10-84

Principal $13,337 $9,308

Chapter 10 - Reporting and Interpreting Non-current Liabilities

162. Goodgold Corporation purchased a machine which had a current cash equivalent cost of $38,971 on January 1, 20X1. Goodgold paid cash of $10,000 and signed an interest-bearing note for the balance, payable in six equal annual instalments on each December 31 beginning with December 31, 20X1. The note specified a 10% interest rate on the unpaid balance. A. Give the entry to record the purchases on January 1, 20X1 (round to the nearest dollar) B. Give the entry to record the first installment payment on December 31, 20X1 (round to the nearest dollar) A. Machine Cash Note Payable

38,971 10,000 28,971

B. Interest Expense ($28,971 × 10%) Note Payable Cash $28,971/4.3553 (Pn = 6; I = 10%)

2,897 3,755 6,652

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

163. Wheel Company purchased an asset that cost $70,000 on January 1, 20X1. Arrangements were made with the supplier to pay $10,000 cash on January 1, 20X1, and the balance was to be paid over a three-year period, with equal annual payments of $24,553 to be made at the end of 20X1, 20X2, and 20X3. Each payment will include principal plus interest on the unpaid balance at 11% per year. A. Complete the following table.

Date 01/01/20X1 12/31/20X1 12/31/20X2 12/31/20X3 Totals

Payment

Interest Expense

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Reduction in Principal

Unpaid Principal

Chapter 10 - Reporting and Interpreting Non-current Liabilities

* Round to reduce principal to zero. B. Give the entry for the payment on December 31, 20X2 C. On the debt payment schedule, what is the trend of amounts for interest expense and principal reduction over time? Explain your response. A. Date 01/01/20X1 12/31/20X1 12/31/20X2 12/31/20X3 Totals

Payment $24,553 24,553 24,553 $73,659

Interest Expense

Reduction in Principal

$6,600 4,625 *2,434 $13,659

$17,953 19,928 22,119 $60,000

Unpaid Principal $60,000 42,047 22,119 -0-0-

* Rounded. B. Note Payable Interest Expense Cash

19,928 4,625 24,553

C. Interest decreased over time because part of each debt payment reduces principal. As a result, over time the debt principal decreased each year.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

10-87

Chapter 10 - Reporting and Interpreting Non-current Liabilities

164. On January 1, 20X1, Precision Drilling Company agreed to buy some equipment from Adams Company. Precision Drilling signed a note, agreeing to pay Adams $500,000 for the equipment on December 31, 20X3. The market rate of interest for this note was 10%. Required: A. Prepare the journal entry Precision Drilling would record on January 1, 20X1 related to his purchase. B. Prepare the December 31, 20X1, adjusting entry to record interest expense related to the note for the first year. C. Prepare the December 31, 20X2, adjusting entry to record interest expense related to the note for the second year. D. Prepare the entry Precision Drilling would record on December 31, 20X3, the due date of the note to record interest expense for the third year and payment of the note. E. What happens to the equipment account amount originally recorded through the life of this note? Why? A. $500,000 ´ 0.7513 = $375,650 (Present value of $1; Three periods, 10%)

Equipment Notes Payable

375,650 375,650

B. $365,650 ´.10 = $37, 565

Interest Expense Notes Payable

37,565 37,565 41,322

Interest Expense Notes Payable

41,322

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

$375,650 + 37,565 = 413,215 ´.10 = 41,322 D. (375,650 + 37,565 + 41,322) ´.10 = 45,454 (rounding error; use $45,463

Interest Expense Notes Payable Notes Payable Cash

45,463 45,463 500,000 500,000

E. The amount originally recorded in the equipment account stays the same, because that was the cost (in present value terms) of the equipment. Of course, the depreciation would be tracked in accumulated depreciation and the carrying value of the equipment would drop overtime.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 10-02 Report notes payable and related interest expense. Topic: 10-05 Reporting Note Transactions

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

165. Why are present value concepts and applications so important when companies purchase equipment financed by the seller? Present value concepts are very important in seller financed purchases because the debt payments will include principal and interest payments. The equipment should be capitalized at an amount equal to the present value of the purchase. That is, the asset account should reflect what the equipment could have been acquired for in terms of "today's dollars." The larger amount that you pay the seller in the future is larger because it includes interest are charges for borrowing. These interest amounts should be reported as interest expense as incurred.

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 10-01 Describe the characteristics of long-term notes and bonds payable. Topic: 10-01 Characteristics of Long-Term Notes and Bonds Payable

10-90

Chapter 10 - Reporting and Interpreting Non-current Liabilities

166. Trollium Properties reported the following account balances and events at their September 30, 20X4 year-end. None of the year-end adjusting entries have been made.

Amounts owing to suppliers Amount outstanding on the line of credit, estimated interest owing $225. Amounts withheld from employee pay cheques to be remitted Oct 10. Bonds outstanding, 6% semi-annual coupon. Unamortized portion of bond premium. The last coupon was paid September 30 Amount of shortfall of pension assets relative to pension obligations at year-end. Balance outstanding on mortgages. Next payment, due October 1, consists of $1,042 of interest and $1,458 of principal. The next 12 monthly payments (including the one due Oct 1) will total $30,000 of which $16,500 will be applied to the principal Rent payments received in advance from tenants for October

$42,000 $33,700 $18,750 $500,000 $24,600 $135,700 $125,000

$22,400

Required: Prepare the liability section of their statement of financial position at September 30, 20X4 including the effects of any required adjustments. Please review the following information:

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Chapter 10 - Reporting and Interpreting Non-current Liabilities

Current Liabilities Bank overdraft Accounts payable Interest payable (225 + 1,042) Withholdings payable Unearned Rent Current portion of mortgages

$33,700 42,000 1,267 18,750 22,400 16,500 134,617

Long-term liabilities Mortgage (125,000 - 16,500) Bonds payable Pension liability

108,500 524,600 135,700 768,800 $903,417

Total liabilities

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 10-06 Describe other non-current liabilities. Learning Objective: 10-07 Compute and interpret the debt-to-equity ratio. Topic: 10-16 Other Non-Current Liabilities

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

Chapter 11 Reporting and Interpreting Shareholders' Equity

True / False Questions 1. Shareholders have limited liability, which means that they are usually held liable for the corporation's debts. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 11-01 Explain the role of share capital in the capital structure of a corporation. Topic: 11-01 Ownership of a Corporation

2. A major advantage that a corporation has over a proprietorship or partnership is that it allows individuals to participate in ownership by purchasing small amounts of shares. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-01 Explain the role of share capital in the capital structure of a corporation. Topic: 11-01 Ownership of a Corporation

3. Secondary trading of a company's shares do not have a direct impact on the company's cash flows. TRUE

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

4. In general, the price of a company's shares follows the trend in its earnings and dividends. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-02 Analyze the earnings per share ratio. Topic: 11-03 Authorized, Issued, and Outstanding Shares

5. A shareholder owning common shares has the right to vote in the election of the board of directors. TRUE

6. Since most small shareholders do not attend the annual corporate meeting, they will usually cast their vote by proxy card. TRUE

7. An initial public offering (IPO) occurs the first time a corporation sells shares to the public. TRUE

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

8. Preferred shares often are called the residual equity because they usually do not have voting rights. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-01 Explain the role of share capital in the capital structure of a corporation. Topic: 11-01 Ownership of a Corporation

9. If a corporation issues 1,000 of its shares for $15 per share, contributed capital increases by $15,000. TRUE

10. If common shares are reacquired at a price less than their average cost, the difference is credited to contributed surplus. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-03 Describe the characteristics of common shares, and analyze transactions affecting common shares. Topic: 11-10 Repurchase of Shares

11. One of the reasons a company may reacquire its own shares is to reduce the market value to make the shares more affordable. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common shares, and analyze transactions affecting common shares. Topic: 11-10 Repurchase of Shares

11-3

Chapter 11 - Reporting and Interpreting Shareholders' Equity

12. When a company reacquires its own shares, the shares are effectively restored to authorized but unissued status. TRUE

13. Preferred shares often have a preference in the distribution of assets over common shares in the event of dissolution of the corporation. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-07 Describe the characteristics of preferred shares, and analyze transactions affecting preferred shares. Topic: 11-15 Preferred Shares

14. The actual cost of reacquired shares is credited to the common share account. FALSE

15. Both inflows (e.g., issuance of share capital) and outflows (e.g., repurchase of shares) are reported in the Financing Activities section of the statement of cash flows. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-09 Discuss the impact of share capital transactions on cash flows. Topic: 11-20 Accumulated Other Comprehensive Income (Loss)

11-4

Chapter 11 - Reporting and Interpreting Shareholders' Equity

16. Share capital is the amount paid in to the corporation by shareholders in exchange for shares of ownership. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-03 Describe the characteristics of common shares, and analyze transactions affecting common shares. Topic: 11-04 Common Share Transactions

17. The common shares receive a fixed dividend rate set in the share contract. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

18. The issue of common shares affects both share capital and retained earnings. FALSE

19. Preferred shares provide investors certain advantages, but not dividend preferences and a preference on asset distributions in the event the corporation is liquidated. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-07 Describe the characteristics of preferred shares, and analyze transactions affecting preferred shares. Topic: 11-15 Preferred Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

20. The number of common shares authorized is almost always greater than the number of shares issued. TRUE

21. Most companies provide needed funds for expansion from a combination of operating and financing activities. This means that cash flow used by investing activities is usually provided by positive cash flow from operations and through a combination of borrowings or share issuances. TRUE

22. Preferred shares have contractual preference over common shares in certain areas. TRUE

23. When shareholder A sells Walmart shares to investor B, this transaction takes place in the secondary market. Walmart is not impacted by this trade and receives nothing from the transaction. TRUE

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

24. Preferred shareholders generally do not have the right to vote for the board of directors. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred shares, and analyze transactions affecting preferred shares. Topic: 11-15 Preferred Shares

25. When preferred shares are non-cumulative, preferred dividends not declared in a given period are called dividends in arrears. FALSE

26. Dividends must be declared and paid in cash or stock by public corporations TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

27. Cash dividends are not a liability of the corporation until they are declared by the board of directors. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

11-7

Chapter 11 - Reporting and Interpreting Shareholders' Equity

28. A stock dividend does not affect the total amount of shareholders' equity. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits, and report transactions. Topic: 11-14 Stock Splits

29. A stock split results in a transfer at market value from retained earnings to share capital. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits, and report transactions. Topic: 11-14 Stock Splits

30. International Financial Reporting Standards require Canadian publicly accountable enterprises to report Accumulated Other Comprehensive Income (Loss). This equity item reflects the financial effect of events that cause changes in shareholders' equity other than investments by shareholders or distributions to shareholders. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-20 Accumulated Other Comprehensive Income (Loss)

31. A 3 for 1 stock split will increase total shareholders' equity but reduce the legal capital per common share. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits, and report transactions. Topic: 11-14 Stock Splits

11-8

Chapter 11 - Reporting and Interpreting Shareholders' Equity

32. Retained earnings represents the amount of cash available for dividends. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

33. Dividends in arrears are liabilities of the corporation. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

34. Net earnings of a corporation should be closed to retained earnings and net losses should be closed to share capital accounts. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

35. Accumulated other comprehensive income is reported in the shareholders' equity section of the statement of financial position. TRUE

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

36. Preferred share dividends in arrears must be paid before dividends on common shares can be paid if the preferred share has a cumulative dividend preference. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

37. Other comprehensive income includes unrealized gains or losses on debt or equity securities available-for-sale. TRUE

38. When preferred shares are cumulative and the board of directors passes on a dividend, the amount in arrears must be shown as a liability on the statement of financial position and a reduction from retained earnings on the statement of shareholders' equity and the statement of financial position. FALSE

39. The dividend yield ratio measures the dividend return on the current price of the shares. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-05 Analyze the dividend yield ratio. Topic: 11-11 Dividends on Common Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

40. The dividend yield ratio is calculated by dividing the market price per share by dividends per share. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-05 Analyze the dividend yield ratio. Topic: 11-11 Dividends on Common Shares

41. A very low or a zero dividend yield ratio is usually indicative of a growth-oriented corporation. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-05 Analyze the dividend yield ratio. Topic: 11-11 Dividends on Common Shares

42. The dividend yield ratio is a measure of the immediate return investors are receiving from dividends stated as a percentage of market price. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-05 Analyze the dividend yield ratio. Topic: 11-11 Dividends on Common Shares

43. Earnings per share is calculated by dividing the net earnings available to common shareholders by the number of common shares issued at year end. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Topic: 11-03 Authorized, Issued, and Outstanding Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

44. Net earnings available to common shareholders is calculated by deducting preferred dividends from net earnings. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Topic: 11-03 Authorized, Issued, and Outstanding Shares

45. When a corporation calls in its outstanding shares and issues two or more shares with a lower value in place of each share called in, the corporation is said to have issued a stock split. TRUE

46. A stock dividend usually causes a transfer of retained earnings to share capital, but not a decrease in the assets of the issuing corporation. TRUE

47. Stock splits and stock dividends are basically the same from the viewpoint of the shareholders but not from the viewpoint of the corporation. TRUE

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

48. A small stock dividend is generally defined as one involving the distribution of additional shares that are more than 50% of the currently outstanding shares. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits, and report transactions. Topic: 11-13 Stock Dividends

49. Economically a cash dividend is the only real dividend. TRUE

50. A stock dividend requires a journal entry when issued, but a stock split does not require a journal entry. TRUE

51. While a cash dividend reduces assets, a stock dividend only shuffles amounts between shareholders' equity accounts. TRUE

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

52. The most common reason a company would declare a stock split is to reduce the market price of its share to increase the trading activity. TRUE

53. Retained earnings is one of the major categories of contributed capital. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

54. A statement of changes in equity reflects the changes in Retained Earnings during the year. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

55. Adjustments to the financial statements of prior periods should be made if an entity changes its accounting policies. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

56. Retained earnings is the cash from operations retained by the corporation which may be returned to investors in the form of dividends. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

57. Some preferred share issues are redeemable at the option of the shareholder. FALSE

58. Partnerships, sole proprietorships, and corporations are three basic forms of business organizations. TRUE

59. A primary disadvantage of a partnership is the unlimited liability of the partners for partnership debts. TRUE

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

Multiple Choice Questions 60. With respect to a corporation, select the statement that is false: A. Its organization requires an approved charter which is governed by state law. B. Ownership rights to the corporation are transferable. C. A corporation is a separate legal entity from its owners. D. A corporation cannot sue others or be sued.

61. Which one of the following is not a basic right of an owner of common share? A. Participation in the corporation by voting in shareholder meetings. B. Participation in the profits of the corporation through dividends declared by the board of directors. C. Sharing in the responsibility of setting next year's budget. D. Sharing in the distribution of assets of the corporation at liquidation.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-01 Explain the role of share capital in the capital structure of a corporation. Topic: 11-01 Ownership of a Corporation

62. The authorized shares of a corporation A. only reflects the initial capital needs of the company. B. is indicated in its by-laws. C. is indicated in its charter. D. must be recorded in a formal accounting entry.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

63. The articles of incorporation include all of the following except: A. The types of shares to be issued. B. the costs of issuing the shares. C. the type of business to be conducted. D. how the board of directors will be organized.

64. From an investor's viewpoint, in today's litigious environment, what would be considered the most advantageous characteristic of the corporate form of organization? A. Lack of income taxes on the business itself. B. Absolute control and management in the hands of shareholders. C. Non-applicability of going concern. D. Limited liability for shareholders.

65. For accounting purposes, the most important section of the articles of incorporation is the description of A. the types of shares to be issued. B. the costs of issuing the shares. C. the type of business to be conducted. D. how the board of directors will be organized.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

66. Which of the following statements is false? A. Most small shareholders who do not attend the corporation's annual meeting, can cast their vote by proxy card. B. Some corporations are evaluated by application to a specific provincial government. C. Some corporations are evaluated by application to the federal government. D. Corporations do not limit the liability of its owners.

67. Which of the following represents the shares currently in the hands of investors? A. Authorized shares B. Issued shares C. Outstanding shares D. Unissued shares

68. Which of the following statements about issuing common shares is true? A. The total amount received is referred to as legal capital and it may be paid out as dividends once the company is profitable. B. The total amount received is referred to as legal capital and it cannot be paid out as dividends. C. All classes of common shares pay identical dividends. D. All classes of common shares have the same voting rights.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

69. Excel Corporation had net earnings of $500,000. It paid $125,000 in dividends to the preferred shareholders. Excel Corporation had a weighted average of 1,500,000 common shares and 250,000 preferred shares. Excel Corporation's earnings per share was: A. $0.25 B. $0.33 C. $0.29 D. $0.21 Net earnings available to common shareholders/Average number of common shares outstanding = ($500,000 - $125,000)/1,500,000 = $0.25.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Topic: 11-03 Authorized, Issued, and Outstanding Shares

70. In calculating basic earnings per share, if the preferred shares are cumulative, the amount that should be deducted as an adjustment to the numerator is the A. annual preferred dividend. B. preferred dividends in arrears. C. annual preferred dividends net of income tax. D. preferred dividends in arrears net of income tax.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Topic: 11-03 Authorized, Issued, and Outstanding Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

71. Berkson Hawthorn is a public company trading on the Toronto Stock Exchange. The company's shares are currently trading for $16.00 per share. Berkson just released the following information related to its 20X7 year-end:

Total assets Total liabilities Net income Preferred share dividends Average number of common shares outstanding

20X7 $14,500,000 $7,500,000 $762,500 $65,000 100,000

20X6 $13,250,000 $6,750,000 $555,000 $65,000 100,000

For 20X7, the company's earnings per share were closest to A. $6.50 B. $6.98 C. $7.63 D. $7.00 ($762,500 - $65,000) / 100,000 = $6.98.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Topic: 11-03 Authorized, Issued, and Outstanding Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

72. Domus Realty Limited has 20,000 common shares issued and outstanding at January 1, 20X4. On July 1, the company sold an additional 10,000 common shares for proceeds of $100,000. Net income for the year was $30,000. What would the earnings per share be? A. $1.00 B. $3.33 C. $1.20 D. $4.00 $30,000/25000 shares=1.2

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Topic: 11-03 Authorized, Issued, and Outstanding Shares

Belson Ltd. was organized on January 1, 20X4, with 300,000 no par value common shares authorized. During 20X4, the corporation had the following share transactions:

Jan 4 Mar 8 May 17 Jul 6 Aug 27

Issued 120,000 shares at $10 per share Issued 40,000 shares at $11 per share Purchased 15,000 shares at $12 per share and cancelled them Issued 30,000 shares at $13 per share Issued 10,000 shares at $14 per share

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

73. The total amount in the common shares account at December 31, 20X4 is A. $2,170,000 B. $2,007,250 C. $1,990,000 D. $2,016,250 [(120,000 ´ $10) + (40,000 ´ $11)] ÷ 160,000 = $10.25 (120,000 ´ $10) + (40,000 ´ $11) - (15,000 ´ $10.25) + (30,000 ´ $13) +(10,000 ´ $14) = $2,016,250.

74. The total amount of contributed surplus at December 31, 20X4 is A. $0 B. $26,250 C. $153,750 D. $180,000 Paid more than carrying value of the shares, therefore difference is debited to Retained Earnings.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

75. An additional contributed surplus account under shareholders' equity is the result of: A. the sale of preferred shares B. the sale of par value shares C. the sale of no par value shares D. legal capital

76. Which of the following statements is true? A. Common shares have a dividend rate fixed by the share contract. B. Preferred shares have a volatile market value therefore, they are a riskier investment than common shares. C. All public corporations pay a dividend. D. Transfer of ownership is easy with a corporation.

77. A "gain" on the sale of treasury shares should be credited to A. contributed surplus B. share capital C. other income D. retained earnings

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

78. A company purchased its own shares on January 1, 2014 for $20,000 and debited Treasury Shares for the purchase price. The shares were subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a debit to A. retained earnings B. loss from sale of treasury shares C. Contributed Surplus to the extent that previous net "gains" from sales or retirements of the same class of shares exist, otherwise, to retained earnings D. Contributed Surplus, regardless of whether previous net "gains" from sales or retirements of the same class of shares exist.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 11-03 Describe the characteristics of common shares, and analyze transactions affecting common shares. Topic: 11-10 Repurchase of Shares

79. Which of the following statements about shares issued in exchange for assets is true? A. They impact cash flows. B. They are disclosed in a note to the statement of cash flows. C. They are classified as operating activities. D. They are classified as investment activities.

80. Which of the following statements is false? A. A stock dividend has no impact on cash. B. Repurchase of shares (treasury shares) and payment of cash dividends reduce cash flow from financing activities. C. Issuance of shares would increase cash from financing activities. D. Repurchases of shares at prices lower than the average issue price result in profit for the issuing company.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

81. Some managers argue that since employee stock options are usually issued at an exercise price that is less than or equal to market value when they are granted, they have no value. However, generally accepted accounting principles require that they be recorded as compensation expense. The primary reason for this is: A. To achieve proper matching. B. The time value in the options creates economic value. C. The entity must use employee stock options in order to compete for talent. D. They are accepted by employees as compensation.

82. Which of the following statements about stock option plans is false? A. Offering excessive stock options to a company's managers reduces the likelihood they will not always act in the best interest of the investors. B. Stock option plans are often a major part of an executive's compensation plan. C. Stock options usually have a grant price equal to the market price of the share when the options are first offered to the executives. D. The holder of a stock option has an interest in a company's performance but not in the same manner as a shareholder.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

83. All of the following are true about the uses of employee stock options as compensation except: A. they do not require any cash payment. B. they have no cost to the company. C. they align employee motivation to the shareholders' objectives. D. employees can choose to sell their shares if they wish.

84. The statement of financial position of Warner Company showed the following data about its common shares: authorized shares, 100,000; outstanding shares, 55,000; and issued shares 60,000. What was the number of treasury shares? A. 5,000 B. 30,000 C. 40,000 D. 45,000 Calculation: 60,000 - 55,000 = 5,000.

85. The date on which a cash dividend becomes a binding legal obligation is on the A. declaration date. B. date of record. C. payment date. D. last day of the fiscal year end.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

86. Assume the following shares outstanding: (1) Preferred shares, $3, cumulative, 1,000 shares with dividends in arrears 3 years, for 20X1, 20X2, and 20X3. (2) Common shares, 2,000 shares. Total dividends declared in 20X4 were $30,000. What is the total amount of dividends to which common shareholders are entitled? A. $18,000 B. $21,000 C. $27,000 D. $30,000 Calculation: $30,000 - (1,000 ´ $3 ´ 4) = $18,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Learning Objective: 11-07 Describe the characteristics of preferred shares, and analyze transactions affecting preferred shares. Topic: 11-11 Dividends on Common Shares Topic: 11-17 Dividends on Preferred Shares

87. Which of the following is eligible for dividends? A. The number of shares of authorized. B. The number of shares issued. C. The number of shares outstanding. D. The number of treasury shares.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-03 Authorized, Issued, and Outstanding Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

88. Slow, Inc., reported the following asset and liability balances at the ends of 20X1 and 20X2:

20X1 Total Assets Total Liabilities Cash

$80,000 50,000 22,000

20X2 $110,000 40,000 32,000

During 20X2, cash dividends of $5,000 were declared and paid. Additional shares were issued for $15,000. What was the profit (or loss) for 20X2? A. $30,000 B. $35,000 C. $40,000 D. $45,000 Calculation: Equity at the end of 20X2 = ($80,000 - $50,000) - $5,000 + $15,000 = $40,000 Equity as per the report = $110,000 - $40,000 = $70,000 Net profit for the year 20X2 = $70,000 - $40,000 = $30,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

89. Accounting entries associated with a cash dividend are usually made on which of the following dates? A. Record date and payment date. B. Payment date only. C. Declaration date and record date. D. Declaration date and payment date.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

90. On December 15, 20X2, the board of directors of Home Corporation declared a cash dividend, payable on January 8, 20X3, of $2 per share on the 100,000 common shares outstanding. The accounting period ends December 31. Because of this action, on December 15, 20X2, Home Corporation should do which of the following? A. Make no journal entry because the event had no effect on the corporation's financial position until 20X3. B. Decrease retained earnings $200,000 and increase liabilities $200,000. C. Decrease retained earnings $200,000 and increase contributed capital $200,000. D. Decrease cash $200,000 and decrease retained earnings $200,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

91. Spot Corporation declared a cash dividend on December 30, 20X1, payable on January 10, 20X2. A journal entry for the dividend was not made in December 20X1. What were the effects on the 20X1 financial statements? A. Retained earnings and liabilities were understated. B. Retained earnings and liabilities were overstated. C. Retained earnings was overstated and liabilities understated. D. Retained earnings was overstated and cash understated.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

92. The Basket Corporation has the following classes of shares: Preferred shares, $40, 1,000 shares issued and outstanding, non-cumulative. Common shares, 100,000 shares issued, 50,000 shares outstanding. In 20X1, Basket Corporation was incorporated. It paid no dividends in its first year of existence. In 20X2, the board of directors of Basket declared a total dividend of $180,000 to be paid to the holders of preferred and common shares. What was the amount of the dividend paid in 20X2 on each common share? A. $1.80 B. $2.00 C. $2.80 D. $3.60 Calculation: [$180,000 - (1,000 ´ $40)] ÷ 50,000 = $2.80.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

93. The declaration and payment of a cash dividend does which of the following? A. Reduces retained earnings and increases liabilities by the amount of the dividend. B. Reduces retained earnings and increases contributed capital by the same amount. C. Reduces assets and increases liabilities each by the amount of the dividend. D. Reduces assets and retained earnings each by the amount of the dividend.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

94. The dividend yield ratio A. = Dividends per share/Earnings per share B. measures the percentage return that shareholders earn from the dividends they receive. C. should be considered bad if it is low and good if it is high. D. = Market price per share/Dividends per share.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-05 Analyze the dividend yield ratio. Topic: 11-11 Dividends on Common Shares

95. In 20X4, W Co had a dividend yield ratio of 0.3% and J.C. Co. reported a yield of 6.9%. What is the most likely reason for W Co's relatively low dividend yield in comparison to J.C. Co's ratio? A. W Co is paying little in dividends because it continues to grow through expansion of store locations financed by operations. B. W Co does not generate sufficient cash from operations to be able to pay a dividend. C. W Co does not generate sufficient operating profit to support declaring a dividend. D. W Co does not have sufficient retained earnings to support declaring a dividend.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 11-05 Analyze the dividend yield ratio. Topic: 11-11 Dividends on Common Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

96. In 20X4, P Co declared dividends totaling $.52 per common share when earnings per share were $1.31 and its market price was 40 7/16. In 20X3, its dividends totaled $.46 per share, its earnings per share were $1.36 and its market price was 34 11/16. What was the computed dividend yield ratio for 20X4 and 20X3 respectively? (Rounded to nearest 1 decimal) A. 1.8% and 1.9% B. 1.3% and 1.3% C. 1.7% and 1.3% D. 2.1% and 2.3% Calculation: $.52 ÷ $40.4375 = 1.3% for 20X4; $.46 ÷ $34.6875 = 1.3% for 20X3.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-05 Analyze the dividend yield ratio. Topic: 11-11 Dividends on Common Shares

97. Which of the following statements about dividends is false? A. A low dividend yield is usually indicative of a growing company. B. The lower the dividend yield, the less a company has distributed to investors as an immediate return. C. D. The dividend yield ratio is a measure of the immediate return investors are receiving from dividends stated as a percentage of market price.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-05 Analyze the dividend yield ratio. Topic: 11-11 Dividends on Common Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

98. Which of the following is false about the dividend yield ratio? A. Dividend yield ratio = Dividends per share/Market price per share. B. Measures the profit generated by each share for the shareholder based on the market price of the shares. C. A low dividend yield is neither bad nor good by itself. D. Dividend yield ratio = Market price per share/Dividends per share.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-05 Analyze the dividend yield ratio. Topic: 11-11 Dividends on Common Shares

99. On January 1, Nortell Inc. had total shareholders' equity as shown below when their shares were trading at $25 per share

Common shares - 125,000 shares issued and outstanding Retained earnings Total shareholders' equity

$2,500,000 4,000,000 $6,500,000

Assume the company declared and issued a 50% stock dividend. The effect of this dividend would: A. increase common shares by 62,500 and increase shareholders' equity B. increase common shares by $1,250,000 with no change in the number of issued and outstanding shares C. leave total shareholders' equity unchanged but increase the number of shares issued and outstanding to 187,500 D. reduce retained earnings by $2,000,000 and double the number of shares issued and outstanding

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

100. Corporations generally issue stock dividends in order to A. increase the market price per share. B. exceed shareholders' dividend expectations. C. increase the marketability of the shares. D. decrease the amount of capital in the corporation.

101. A shareholder who receives a stock dividend would A. expect the market price per share to increase. B. own more shares. C. expect retained earnings to increase. D. expect the legal capital of the shares to change.

102. On which of the following dates should the dividends payable account be recorded in the company records for a stock dividend? A. Date of payment. B. Date of record. C. Date of declaration. D. No liability is associated with a share dividend.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

103. A stock dividend results in a decrease in A. earnings. B. retained earnings. C. share capital. D. none of the choices.

104. The per share amount normally assigned by the board of directors to a stock dividend is A. the fair value at the distribution date. B. the average price paid by shareholders on total shares issued. C. the fair value at the declaration date. D. zero.

105. A stock dividend results in A. the same ownership interest. B. greater ownership interest. C. less ownership interest. D. increased total assets.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

106. The declaration of a stock dividend will A. increase share capital. B. change the total of shareholders' equity. C. increase total liabilities. D. increase total assets.

107. Which of the following statements about a 2 for 1 stock split is not true? A. The market value of the share will probably decrease. B. A shareholder with 200 shares before the split owns 400 shares after the split. C. Legal capital per share is reduced to half of what it was before the split. D. Total share capital increases.

108. A stock split will A. have no effect on retained earnings. B. increase total share capital. C. reduce retained earnings. D. decrease the number of shares.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

109. Towson Inc. had 300,000 common shares before a stock split occurred and 600,000 shares after the stock split. The stock split was A. 2 for 4. B. 4 for 1. C. 1 for 4. D. 2 for 1. Shares after the stock split/Shares before stock split = Stock Split 600,000 ÷ 300,000 = 2 for 1.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits, and report transactions. Topic: 11-14 Stock Splits

110. Which of the following is true with regards to a stock dividend? A. It results in a transfer of retained earnings to contributed capital. B. It increases the number of shares outstanding and involves a pro rata reduction in the par value per share. C. It is accounted for in the same manner as a stock split. D. It does not require a journal entry.

111. One characteristic of a stock split is that it will A. reduce retained earnings. B. increase total share capital. C. increase the share price. D. increase the number of shares.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

112. Wide World Corporation issued a 3-for-2 stock split (i.e., three new shares in exchange for each two old shares turned in) of its common shares which had a market value of $100 before the split. What dollar amount of retained earnings should be transferred to the common share account? A. Market value before the split. B. Market value after the split. C. Half of the previous total amount in the common share account(s). D. None should be transferred.

113. Which one of the following events would not require a journal entry on a corporation's books? A. 100% stock dividend B. 2 for 1 stock split C. 2% stock dividend D. $1 per share cash dividend

114. The effect of a stock dividend is to A. change the composition of shareholders' equity. B. decrease total assets and shareholders' equity. C. decrease total assets and total liabilities. D. increase the book value per share of common shares.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

115. With respect to preferred shares, select the statement that is correct. A. They must have a par value. B. They are never issued without voting privileges. C. They cannot exist unless there also are common shares. D. They always provide for a fixed payment to be made to the shareholders even for years when no dividends have been declared.

116. The conversion feature on convertible preferred shares enables the shareholder to convert them to which of the following? A. Common shares. B. Cash. C. Convertible bonds. D. Products or services of the company.

117. Dividends in arrears on cumulative preferred shares A. never have to be paid, even if common dividends are paid. B. must be paid before common shareholders can receive a dividend. C. should be recorded as a current liability until they are paid. D. enable the preferred shareholders to share equally in corporate profit with the common shareholders.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred shares, and analyze transactions affecting preferred shares. Topic: 11-17 Dividends on Preferred Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

118. Which of the following are the typical rights afforded to preferred shareholders? A. A preference to receive dividends when declared by the board of directors after common shareholders receive their dividends. B. A preference to receive the liquidation value of the assets as stated in the share contract after common shareholders receive their share. C. The right to vote on major corporate issues including electing the board of directors. D. A preferential right to receive dividend and a preference to receive the liquidation value of assets over common stock holders.

119. Dunbar Inc. has 10,000 $2, non-cumulative preferred shares and 150,000 common shares issued at December 31, 20X2. What is the annual total dividend on the preferred shares? A. $10,000 B. $20,000 C. $150,000 D. $300,000 Calculation: 10,000 ´ $2 = $20,000.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

120. Slick Willie Inc. had the following shares outstanding during 20X3: (1) Preferred shares, $3, cumulative, 1,000 shares with dividends in arrears for 20X1 and 20X2. (2) Common shares, 2,000 shares. The total dividends declared for the current year were $21,000. What is the total amount of dividends to which the preferred shareholders are entitled? A. $3,000 B. $6,000 C. $9,000 D. $12,000 Calculation: 1,000 ´ $3 ´ 3 = $9,000.

121. At January 1, 20X4, Clare Corporation had outstanding capital shares as shown below. During December, 20X4, it declared and paid cash dividends of $48,000 to the preferred shareholders. (1) Common shares--100,000 shares outstanding (2) Preferred shares--20,000 shares outstanding, $0.80 cumulative. The shares were issued at a price of $15 per share. How many years were the preferred dividends in arrears? A. One year. B. Two years. C. Three years. D. Four years. Calculation: $48,000 ÷ (20,000 ´ $0.80) = 3 years (current plus previous 2 years).

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

122. What is the difference between cumulative and non-cumulative preferred shares? A. They both receive dividends in arrears. B. Cumulative preferred shares' undeclared dividends accumulate each year until paid, while non-cumulative preferred shares' right to receive dividends is forfeited in any year that dividends are not declared. C. Cumulative does not receive dividends but noncumulative does. D. Cumulative preferred share's right to receive dividends is forfeited in any year that dividends are not declared. However, noncumulative preferred shares' undeclared dividends accumulate each year until paid.

123. Cosby Inc. has 10,000, $5, cumulative preferred shares at December 31, 20X4. If the board of directors declares a $40,000 annual dividend in 20X4, A. the company will still owe the preferred shareholders $10,000 and should record a dividend payable in this amount. B. the company will owe the preferred shareholders nothing further. C. the $10,000 will be disclosed as dividends in arrears in the notes to the financial statements. D. the company still has to pay the preferred shareholders $50,000, regardless of what amount was declared.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

124. Dividends in arrears on cumulative preferred shares A. are considered to be a non-current liability. B. are considered to be a current liability. C. only occur when preferred dividends have been declared. D. should be disclosed in the notes to the financial statements.

125. The type of preferred share that can be bought back by the company at a specified time and price is a A. cumulative preferred share. B. convertible preferred share. C. redeemable preferred share. D. nonparticipating preferred share.

126. What type of preferred share is entitled to dividends above its specified dividend if the common shares receive excess dividends and must receive dividends in arrears before the common dividends can be declared? A. Cumulative and participating B. Convertible and participating C. Redeemable and participating D. Redeemable and cumulative

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

127. Which of the following preferred share characteristics give the shareholders the right to force the issuer to re-purchase the shares from them? A. Convertible B. Cumulative C. Retractable D. Redeemable

128. Which of the following statements about retained earnings is true? A. Retained earnings is an asset. B. Retained earnings represents the present value of all future cash flows to the company. C. Retained earnings represents the future dividend liability of the company. D. Retained earnings represents the cumulative profit that has been earned by the company, less any dividends declared since the first day of operations.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

129. Bateman Company reported total shareholders' equity of $58,000 on its statement of financial position dated December 31, 20X2. During 20X2, it reported a profit of $4,000, declared and paid a cash dividend of $2,000, and issued additional shares of $20,000. What was total shareholders' equity at January 1, 20X2? A. $16,000 B. $34,000 C. $36,000 D. $38,000 Calculation: $58,000 - $4,000 + $2,000 - $20,000 = $36,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

130. Retained earnings are occasionally restricted A. to set aside cash for dividends. B. to keep the legal capital associated with share capital intact. C. due to contractual loan restrictions. D. if preferred dividends are in arrears.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

131. At the end of 20X5, the total assets of Dole Corporation were $90,000 and total liabilities were $50,000. The company has been in business five years and has earned an average profit of $4,000 per year during the five years. Total cash dividends of $8,000 were declared and paid. What was the total amount received for the shares issued by the company? A. $28,000 B. $30,000 C. $40,000 D. $46,000 Calculation: ($90,000 - $50,000) - ($4,000 ´ 5 years) + $8,000 = $28,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-18 Measuring and Reporting Changes in Shareholders' Equity

132. Albert Company reported the following statement of financial position amounts at December 31, 20X2:

Current assets Current liabilities Long-term liabilities Operational assets Common shares (10,000 shares issued)

$70,000 40,000 90,000 200,000 100,000

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

What was the total amount of retained earnings on December 31, 20X2? A. $20,000 B. $30,000 C. $40,000 D. $50,000 Calculation: $70,000 + $200,000 - $40,000 - $90,000 - $100,000 = $40,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

133. Before the journal entry to record income tax and before the closing entries were recorded at the end of the accounting period (December 31, 20X4), the following data were taken from the accounts of Buy now Corporation:

Capital shares (20,000 shares issued) Retained earnings, balance December 31, 20X3 Revenues earned during 20X4 Expenses (excluding income tax) incurred during 20X4 Cash dividends declared and paid (during 20X4) Treasury shares (1,000 shares at cost) Average income tax rate, 30%

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$215,000 80,000 400,000 320,000 30,000 17,000

Chapter 11 - Reporting and Interpreting Shareholders' Equity

What is the total amount of shareholders' equity that should be reported on the statement of financial position dated December 31, 20X4? A. $96,000 B. $128,000 C. $300,000 D. $304,000 Calculation: $215,000 + $80,000 + $400,000 - $320,000 - $24,000 - $30,000 - $17,000 = $304,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-18 Measuring and Reporting Changes in Shareholders' Equity

134. During 2019Grand Manufacturing Company discovered that in 2018 they had neglected to record depreciation expense of $12,500 on machinery. What journal entry would they make in 2019? (ignore income tax effects of the error)

A B C D

Office equipment Accumulated depreciation Retained earnings Accumulated depreciation Depreciation expense Accumulated depreciation Accumulated depreciation Retained earnings

12,500 12,500 12,500 12,500 12,500 12,500 12,500 12,500

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A. Choice A B. Choice B C. Choice C D. Choice D

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

135. Miter Corporation had a credit balance of $5,450,000 in its retained earnings account as of January 1, 20X4. During the year, Miter declared $250,000 in dividends, reported net earnings of $560,000 and comprehensive income of $750,000. The December 31 balance of retained earnings is: A. $6,450,000 B. $6,200,000 C. $5,950,000 D. $5,760,000 Calculation:

Beginning balance, retained earnings Add: Net earnings current year Less: Dividends declared Retained earnings, December 31, 20X4

$5,450,00 0 $560,000 $250,000 $5,760,00 0

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-20 Accumulated Other Comprehensive Income (Loss)

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

136. All of the following are normally found in a corporation's shareholders' equity section except A. dividends in arrears. B. common shares. C. share capital. D. retained earnings.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-20 Accumulated Other Comprehensive Income (Loss)

137. Which of the following transactions would not result in a decrease to retained earnings? A. Declaration of a stock dividend B. Correction of an error in which depreciation expense was understated in a prior period C. Reacquisition of shares for less than the original issue price D. Incurrence of a net loss for the period

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

138. Which of the following transactions would not result in an increase to retained earnings? A. Correction of an error in which expenses were overstated in a previous year. B. Declaring a 3-for-1 stock split C. Redemption of shares for less than the original issue price. D. Earning income during the year

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-19 Retained Earnings

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

139. Aloha Corporation had the following activities during the year:

Proceeds from the sale of land Gain on sale of land Proceeds from the issue of common shares Declaration of 10% stock dividend Repayment of mortgage outstanding on the sold land Granted stock options to employees Interest paid Dividends paid

$300,000 $50,000 $1,000,000 $450,000 $200,000 $50,000 $22,500 $10,000

What was Aloha's cash flow from financing activities for the year? A. $767,500 inflow B. $790,000 inflow C. $800,000 inflow D. $740,000 inflow $1,000,000 - $200,000 - $10,000 = $790,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-09 Discuss the impact of share capital transactions on cash flows. Topic: 11-19 Retained Earnings

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

140. Which of the following describes how comprehensive income should be reported? A. Must be reported in a separate statement, as part of a complete set of financial statements. B. Should not be reported in the financial statements but should only be disclosed in the footnotes. C. May be reported in a separate statement, in a combined statement of earnings and comprehensive income, or within a statement of shareholders' equity. D. May be reported in a combined statement of earnings and comprehensive income or disclosed within a statement of shareholders' equity; separate statements of comprehensive income are not permitted.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 11-09 Discuss the impact of share capital transactions on cash flows. Topic: 11-20 Accumulated Other Comprehensive Income (Loss)

141. All of the following statements regarding comprehensive income are true, except: A. Comprehensive income was created to be an all- inclusive measure of performance. B. Comprehensive income captures all transactions and events, even those excluded from net income C. Comprehensive income is not a requirement for public companies under IFRS D. Comprehensive income equals the sum of net income and other comprehensive income

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-20 Accumulated Other Comprehensive Income (Loss)

142. Accumulated other comprehensive income is reported in the: A. Cash flow statement B. Statement of Changes in Shareholders' equity C. Income statement D. Notes to the financial statements

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

143. Which of the following is a major difference between accounting for a corporation versus accounting for a partnership? A. Recording sales revenue. B. Recording office supplies used. C. Recording withdrawals of the owners. D. Recording rent expense.

144. Which of the following accounts would appear in the general ledger of a partnership? A. Retained earnings account. B. Dividends paid account. C. Common share accounts. D. Drawings accounts.

145. A primary advantage of a general partnership, compared with a corporation, does not include which of the following? A. Ease of formation. B. Limited liability for the owners. C. No income tax on the business itself. D. Complete control by the partners.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

Short Answer Questions 146. Match the terms with the definitions below. Terms A. Common shares B. Preferred shares C. Preferred shares, noncumulative D. Preferred shares, cumulative E. None of the above Definitions ____ 1. Shares that have been issued, repurchased, and are held by the corporation. ____ 2. Authorized but unissued shares. ____ 3. Shares that are limited to a specified dividend rate per year. ____ 4. The basic issue of shares; the residual equity. ____ 5. Shares on which dividends in arrears must be paid before current dividends can be paid. ____ 6. Shares with specified differences from the basic shares. (1) E, (2) E, (3) C, (4) A, (5) D, (6) B

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 11-01 Explain the role of share capital in the capital structure of a corporation. Topic: 11-01 Ownership of a Corporation

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

147. Match the type of business with their characteristics below. Type of Business A. Corporation B. Partnership C. Sole proprietorship D. Partnership and sole proprietorship Characteristic ____ 1. Uses withdrawal accounts or drawing accounts. ____ 2. Uses owner capital accounts. ____ 3. Uses retained earnings account. ____ 4. Uses a dividends declared account. ____ 5. Uses a profit ratio to allocate earnings among the owners. ____ 6. Requires a charter. ____ 7. Issues share certificates. ____ 8. Has only one owner. ____ 9. Has a board of directors. ___ 10. Involves more than one owner but has no charter. (1) D, (2) D, (3) A, (4) A, (5) B, (6) A, (7) A, (8) C, (9) A, (10) B

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

148. Match the items with the definitions. Items A. Treasury shares B. Convertible shares C. Preferred shares D. Authorized shares E. Unissued shares F. Redeemable shares G. Cumulative shares Definitions ____ 1. Shares that may, at the option of the holder, be turned in for another security. ____ 2. Shares that have been issued, repurchased, and are held by the corporation. ____ 3. Shares that have specified rights over common shares. ____ 4. Shares on which dividends in arrears must be paid prior to any current dividends. ____5. The maximum number of shares that the corporation is allowed to issue (1) B, (2) A, (3) C, (4) G, (5) D

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common shares, and analyze transactions affecting common shares. Topic: 11-04 Common Share Transactions Topic: 11-05 No Par Value and Par Value Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

149. The charter of President's Corporation specified a maximum of 25,000 common shares. At the current date, 5,000 shares remain unissued, and 2,000 of the issued shares have been reacquired and are still held by President's Corporation. Fill in the following chart with the number of shares.

Type A. Issued B. Unissued C. Authorized D. Outstanding E. Treasury shares

Please review the following information:

Type A. Issued B. Unissued C. Authorized D. Outstanding E. Treasury shares

Shares 25,000 - 5,000 = 20,000 5,000 25,000 20,000 - 2,000 = 18,000 2,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-01 Explain the role of share capital in the capital structure of a corporation. Topic: 11-03 Authorized, Issued, and Outstanding Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

150. What are the advantages of issuing common shares instead of issuing corporate bonds to raise needed funds? Advantages of issuing common shares rather than corporate bonds include: Required repayment of principal sum does not apply. Required interest payments are not applicable. A creditor-debtor relationship does not exist. Shareholders participate in corporate profits when dividends are declared. Dividends are not an obligation of the corporation until the board of directors declares them. When dividends are declared, they are not limited to specific sums like bond payments are.

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 11-01 Explain the role of share capital in the capital structure of a corporation. Topic: 11-01 Ownership of a Corporation

151. What are the advantages of issuing corporate bonds instead of issuing common shares to raise needed funds? Advantages of issuing corporate bonds rather than common shares include: Voting rights are not diluted. Ownership is not diluted. Control is not diluted. Interest expense is a tax deductible expense but dividends are not. Positive financial leverage can exist where a company's profit rate exceeds its borrowing rate.

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

152. The statement of financial position at December 31, 20X1, showed the following data for Bravo Corporation:

Common shares, issue price $10 (authorized 15,000 shares) Treasury shares (at cost $15 per share)

100,000 600

Give the number of shares for each item.

Type A B C D E

Shares Issued Unissued Authorized Outstanding Treasury

Please review the following information:

Type A. Issued B. Unissued C. Authorized D. Outstanding E. Treasury

Shares 100,000/10 = 10,000 15,000 - 10,000 = 5,000 15,000 given 10,000 - 40 = 9,960 600/15 = 40

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 11-01 Explain the role of share capital in the capital structure of a corporation. Topic: 11-03 Authorized, Issued, and Outstanding Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

153. There are three dates in connection with a cash dividend. These three dates are described below. Assume a $5,000 cash dividend. Part A: Name the dates in the space provided:

A B C

Description Date on which the Board of Directors votes on the dividend Date on which the names are taken from the shareholder records Date on which the dividend cheques are mailed

Name of the Date

Part B: Prepare the journal entry for each date:

A B C

Description Date on which the Board of Directors votes on the dividend Date on which the names are taken from the shareholder records Date on which the dividend cheques are mailed

Journal Entry

Part A:

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

A B C

Description Name of the Date Date on which the Board of Directors votes Declaration Date on the dividend Date on which the names are taken from Date of Record the shareholder records Date on which the dividend cheques are Date of Payment mailed

Part B:

Description Date on which the Board of Directors votes on the dividend Date on which the names are taken from the shareholder records Date on which the dividend cheques are mailed

Journal Entry Dividends declared (or retained earnings) Cash No entry required

Dividends Payable Cash

CR 5,000 5,000

5,000 5,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Easy Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

154. At the end of 2019, Aventura Corporation reported a $40,000 balance in its common share account (stated value $5 per share). The treasury share account showed $720 (cost $6 per share). No dividends were paid during the first two years. During 2019 the company declared and paid a cash dividend at $1.50 per share. Calculate the total amount of the 2019 cash dividend. [($40,000/$5 per share) - ($720/$6)] ´ $1.50 = $11,820

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Topic: 11-11 Dividends on Common Shares

155. During 20X2, Washington Corporation made the following journal entry to record the declaration and payment of a cash dividend:

Retained Earnings (Common Shares) Retained Earnings (Preferred Shares) Cash

10,000 3,600 13,600

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

The total values of common and preferred shares outstanding were $70,000 and $40,000, respectively. No dividends were declared or paid during 20X1. There are 1,000 common treasury shares. (a) If the preferred shares are noncumulative, the current dividend rate on the preferred shares was ________%. (b) If the preferred shares are cumulative, the current dividend rate on the preferred shares was ______%. (a) $40,000 ´ Rate = $3,600; Rate = 9% (b) 2 ´ ($40,000 ´ Rate) = $3,600 ($40,000 ´ Rate) = $1,800 Rate = 4.5% (or 9% [from part (a)]/2 = 4.5%

156. Deep Cove Corporation has the following capital shares outstanding: (a) Common shares, 6,000 shares. (b) $0.80 preferred shares, 2,000 shares, cumulative, with 2 years in arrears excluding the current year. A cash dividend of $6,000 was declared and paid near the end of the current year. (a) Total dividends received by the preferred shareholders would be $________. (b) Total dividends received by the common shareholders would be $________. (a) Preferred: 2,000 shares ´ $.80 ´ 3 = $4,800 (b) Common: $6,000 - $4,800 = $1,200

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

157. Contrast the economic effects of a cash dividend (declared and paid) with a share dividend (declared and issued) on the distributing corporation by completing the following chart by placing "X" where appropriate.

Item on Financial Statement

Economic Effect Cash Dividend Share Dividend Increase Decrease Increase Decrease

Assets Liabilities Capital Shares Issued Retained Earnings Total Shareholders' Equity

Please review the following information:

Item on Financial Statement Assets Liabilities Capital Shares Issued Retained Earnings Total Shareholders' Equity

Economic Effect Cash Dividend Share Dividend Increase Decrease Increase Decrease X X X X

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits, and report transactions. Topic: 11-11 Dividends on Common Shares Topic: 11-12 Stock Dividends and Stock Splits

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

158. Tractor Corporation was just formed. The following accounts of Tractor Corporation, with code letters, are needed to record the transactions given below. You are to indicate the appropriate journal entry for each transaction by entering the code letters and the correct amounts.

A B C D E F

Cash Remaining assets Retained earnings Common shares Dividends payable Trade payables

G H I J K L

Bonds payable Preferred shares Treasury stock Other accounts not listed Dividends declared No entry needed

Transaction Ex. Sold and issued 10 common shares for $200. Disregard in subsequent transaction. 1 Sold and issued 5,000 common shares at $26 per share 2 Issued a 10% share dividend when the shares were selling at $30 per share 3 Declared a cash dividend of $1 per share on the shares outstanding 4 Paid the cash dividend of $1 per share declared earlier (see above) 5 Purchased 100 treasury shares at $27 per share 6 Issued a 2-for-1 share split when the market price was $20 per share

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Debits Credits Code Amount Code Amount A 200 D 200

Chapter 11 - Reporting and Interpreting Shareholders' Equity

Please review the following information:

Transaction 1 Sold and issued 5,000 common shares at $26 per share 2 Issued a 10% share dividend when the shares were selling at $30 per share 3 Declared a cash dividend of $1 per share on the shares outstanding 4 Paid the cash dividend of $1 per share declared earlier (see above) 5 Purchased 100 treasury shares at $27 per share 6 Issued a 2-for-1 share split when the market price was $20 per share

Debits Credits Code Amount Code Amount A $130,000 D $130,000 C or K C or K E

15,000 D

15,000

5,500 E

5,500

5,500 A

5,500

2,700 A L L

2,700

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common shares, and analyze transactions affecting common shares. Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits, and report transactions. Topic: 11-06 Initial Sales of Shares Topic: 11-10 Repurchase of Shares Topic: 11-14 Stock Splits

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

159. Vegan's Delight Foods Incorporated reported the following amounts of contributed capital in the shareholders' equity accounts as of January 1, 2018:

Contributed Capital: Common shares, authorized 50,000 shares; Issued outstanding 30,000 shares

$250,000

A B

Cash Dividends payable

F G

C D

Common shares Preferred shares

H I

Retained earnings

Treasury shares Contributed capital-treasury share transactions Dividends declared None of the above accounts (specify)

Indicate the journal entry required to record each of the following transactions by entering the letter code corresponding to each account to be debited and credited and the amount of each debit and credit. The transactions are independent unless otherwise stated.

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Transaction Ex.

Sold and issued 10 common shares for $50. Disregard in subsequent transaction. Dec. 1, 2018 - The board of directors declared a $2 per share cash dividend payment which will be paid in 20X6 Dec. 1, 2018 - The board of directors declared (and issued) a 10% stock dividend. At the date of declaration market price per share was $1. Dec. 2, 2018 - The corporation sold and issued 20,000 common shares and received $10 cash per share. Dec. 28, 2018 - The corporation purchased 200 of its own shares at $10 per share.

Code A

Debits Amount

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Code 50 C

Credits Amount 50

Chapter 11 - Reporting and Interpreting Shareholders' Equity

Please review the following information:

Transaction Ex.

Sold and issued 10 common shares for $50. Disregard in subsequent transaction. Dec. 1, 2018 - The board of directors declared a $2 per share cash dividend payment which will be paid in 20X6 Dec. 1, 2018 - The board of directors declared (and issued) a 10% share dividend. At the date of declaration market price per share was $1. Dec. 2, 2018 - The corporation sold and issued 20,000 common shares and received $10 cash per share. Dec. 28, 2018 - The corporation purchased 200 of its own shares at $10 per share.

Code A

Debits Amount

Credits Code Amount 50 C 50

E or H

$60,000 B

$60,000

E or H

3,000 C

3,000

200,000 C

200,000

2,000 A

2,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common shares, and analyze transactions affecting common shares. Learning Objective: 11-04 Discuss dividends, and analyze related transactions. Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits, and report transactions. Topic: 11-10 Repurchase of Shares Topic: 11-11 Dividends on Common Shares Topic: 11-12 Stock Dividends and Stock Splits

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

160. Regan, Inc., declared a cash dividend of $40,000 in 20X2 when the following shares were outstanding:

Common shares, 20,000 shares Preferred shares, 40.60, 2,500 shares

$400,000 25,000

No dividends were declared or paid during the prior year. Compute the amount of cash that would be paid to each shareholder group under each of the following separate cases:

Case A Case B -

The preferred shares are noncumulative Preferred $_____ Common $_____ The preferred shares are cumulative Preferred $_____ Common $_____

Please review the following information:

CASE A Preferred Residual Common Current $1,500 $38,500 Total $15,000 $38,500 CASE B Preferred Residual Common Current $1,500 $37,000 Arrears $1,500 Total $3,000 $37,000

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Chapter 11 - Reporting and Interpreting Shareholders' Equity

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred shares, and analyze transactions affecting preferred shares. Topic: 11-16 Special Features of Preferred Shares Topic: 11-17 Dividends on Preferred Shares

161. Dole Corporation is in the process of preparing the statement of retained earnings for the annual period ended December 31, 20X4. During the preparation process, the company accountant discovered an error in the 20X2 depreciation. There is a restriction on retained earnings for treasury shares that cost $25,000. You are to complete the following statement by filling in the blanks. DOLE CORPORATION Statement of Retained Earnings

Retained earnings balance, January 1, 20X4 _____: Correction of 20X2 Depreciation expense Balance as restated _____ Total Deduct _____: On _____ (including arrears) $6,000 On _____ _____

$180,000 _____ 205,000 _____ 175,000 10,000 $_ ____

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DOLE CORPORATION Statement of Retained Earnings For the Year Ended December 31, 20X4

Retained earnings balance, January 1, 20X4

$180,000

Prior period adjustment Adjustment of 20X2 depreciation

25,000

Balance as restated Net loss for 20X4 Total Deduct dividends declared on 20X4: On preferred shares (including dividends in arrears) $6,000 On common shares 4,000 Retained earnings balance, December 31, 20X4 (Note 1)

205,000 30,000 175,000 10,000 $165,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred shares, and analyze transactions affecting preferred shares. Learning Objective: 11-08 Measure and report changes in shareholders' equity. Topic: 11-17 Dividends on Preferred Shares Topic: 11-19 Retained Earnings

11-72

Chapter 11 - Reporting and Interpreting Shareholders' Equity

162. Madison Co had the following components of shareholders' equity at the beginning of 20X7:

Preferred shares, Class B, no par, $2, noncumulative, redeemable and retractable, 400,000 authorized, 100,000 issued and outstanding Common shares, unlimited number authorized, 600,000 issued and outstanding Retained earnings

$2,000,000

6,000,000 11,400,000

The following events took place during 20X7:

Jan 22 Apr 3 Oct 10 Nov 5

Issuance of 50,000, $3 cumulative preferred shares - Class C for $30 per share 10% common stock dividend declared and issued Common dividends declared and paid by Board of Directors of $1.50 per share Repurchase of 10,000 $2 no par value preferred shares for $26.50 per share

Prepare the financing activities section of the cash flow statement for the year ended December 31, 20X7. Please review the following information:

11-73

Chapter 11 - Reporting and Interpreting Shareholders' Equity

Financing Activities: Issuance of preferred shares Common dividends paid Redemption of preferred shares Cash flow from financing activities

1,500,000 (900,000) (265,000) $335,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 11-09 Discuss the impact of share capital transactions on cash flows. Topic: 11-20 Accumulated Other Comprehensive Income (Loss)

11-74

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

Chapter 12 Communicating Accounting Information and Analyzing Financial Statements

True / False Questions 1. The only objective of financial statements is to provide information to current and potential investors and creditors. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 12-01 Recognize the roles of people involved in the accounting communication process (regulators, managers, boards of directors, auditors, information intermediaries, and users), and the guidance they receive from legal and professional standards. Topic: 12-01 Players in the Accounting Communication Process

2. The cumulative effect of accounting changes is disclosed in the statement of shareholders' equity (or retained earnings). TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-02 Identify the steps in the accounting communication process, including the issuance of press releases, annual reports, quarterly reports, and documents filed with securities commissions. Topic: 12-08 The Disclosure Process

12-1

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

3. Management's success at containing the effects of uncontrollable risks and managing in the face of uncertainties plays a role in analysts' predictions of the future economic health of a specific company. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-01 Recognize the roles of people involved in the accounting communication process (regulators, managers, boards of directors, auditors, information intermediaries, and users), and the guidance they receive from legal and professional standards. Topic: 12-03 Managers (CEO, CFO, and Accounting Staff)

4. Liquidity ratios measure the ability of the company to survive over an extended time period. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

5. To compute component percentages for the statement of earnings, the base amount is profit. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 12-05 Compute and interpret component percentages. Topic: 12-17 Component Percentages

6. In simple terms, a business strategy establishes the objectives a business is trying to achieve. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 12-03 Explain how a company's business strategy affects financial analysis. Topic: 12-14 Understanding a Company's Strategy

12-2

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

7. The only way an investor will get a return on shares while they own the shares(without selling) is for the corporation to distribute a dividend. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

8. A solvency ratio measures the earnings or operating success of a company for a given period of time. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-08 Compute and interpret liquidity ratios. Topic: 12-37 Solvency Ratios

9. The current ratio should not be interpreted on its own without also looking at the receivables turnover and inventory turnover ratios. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

10. The quality of earnings computation is a test of the solvency of the company. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-3

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

11. The receivables turnover ratio is useful in assessing the profitability of receivables. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

12. Since inventory is a significant current asset for most retail organizations, the inventory turnover ratio would be of significance to investors and analysts in terms of assessing liquidity. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

13. The quick ratio of a company will always be less than or equal to its current ratio (working capital ratio). TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

14. The inventory turnover ratio measures the number of times, on average, the inventory was sold during the period. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

12-4

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

15. A price/earnings ratio is viewed as a good measure of a company's dividend paying ability. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-41 Market Ratios

16. The inventory turnover ratio is a measure that focuses on efficient management of inventory. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

17. Financial leverage is positive when the return on equity (ROE) is higher than the return on assets (ROA). TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

18. Profitability ratios are frequently used as a basis for evaluating management's performance. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-5

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

19. If an increase in ROA is the result of borrowing at high interest rates, investors could well interpret negative leverage as reflecting good news. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

20. Both the profit margin ratio and the asset turnover ratio affect a company's return on assets. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

21. A high inventory turnover ratio indicates a large supply of inventory. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

22. The current ratio is a less stringent test of liquidity than is the quick ratio. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

12-6

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

23. The return on assets ratio will be greater than the rate of return on common shareholders' equity if the company has been successful in trading on the equity. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

24. The average days' supply in inventory is computed by dividing the days in the year by the ending balance of inventory. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

25. The price-earnings ratio reflects investors' expectations about the future profitability of the company. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-41 Market Ratios

26. Solvency ratios are evaluated by comparing them over time for a single company or by comparing them with ratios for similar companies. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-08 Compute and interpret liquidity ratios. Topic: 12-37 Solvency Ratios

12-7

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

27. From a creditor's point of view, the higher the debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-08 Compute and interpret liquidity ratios. Topic: 12-37 Solvency Ratios

28. Some amount of financial leverage benefits the common shareholders. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

29. A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

30. Return on assets (ROA) is usually viewed as a realistic measure of management's performance in using all the resources available to the company regardless of how the assets are financed. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-8

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

31. An investor interested in purchasing a company's shares for their income potential would be more interested in the company's payout ratio than its price-earnings ratio. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-41 Market Ratios

32. Liquidity refers to the ability of a company to meet its currently maturing obligations, and solvency refers to the ability of a company to meet its long-term obligations on a continuing basis. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

33. Dividend yield measures earnings generated by each share, based on the market price per share. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-41 Market Ratios

12-9

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

Multiple Choice Questions 34. When are ratios most useful for analysis? A. When used alone. B. When compared with historical ratios of the same company. C. When compared with ratios for other companies in the industry. D. When compared with both historical ratios of the same company and ratios for other companies in the industry.

35. Which of the following people are most interested in the firm's solvency? A. short-term creditors. B. customers. C. competitors. D. long-term creditors.

36. The primary responsibility for the information in a company's financial statements and related disclosures lies with: A. the board of directors. B. the external auditor. C. the CEO and CFO of the company. D. the internal auditors.

12-10

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

37. Why is the audit report important in the analysis of a company? A. The auditors are an independent third party expressing an opinion on the fairness of the financial statements. B. It guarantees the accuracy of the information in the financial statements. C. The auditors are hired by management to assess the appropriateness of the accounting policies chosen. D. It guarantees the accuracy of the internal controls of the company.

38. What type of audit report indicates that the financial statements present fairly the financial position, results of operations and the cash flows for the accounting period? A. A disclaimer of opinion B. A qualified report C. An unqualified report D. An adverse opinion

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-01 Recognize the roles of people involved in the accounting communication process (regulators, managers, boards of directors, auditors, information intermediaries, and users), and the guidance they receive from legal and professional standards. Topic: 12-05 Auditors

39. What is the goal of the International Accounting Standards Board? A. To have worldwide acceptance of a set of international generally accepted accounting principles B. To develop accounting principles to meet the legal and tax needs of countries C. To protect the right of each country to develop and maintain its own accounting standards D. To develop rules for listing securities in any market

12-11

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

40. International financial reporting standards are currently developed by which entity A. the IFRS Foundation B. the International Accounting Standards Board C. the International Organization of Securities Commissions D. the Ontario Securities Commission

41. In Canada, generally accepted accounting principles for private enterprises are currently developed by which entity? A. The Securities and Exchange Commission B. Ontario Securities Commission C. The Private Company Accounting Oversight Board D. The Accounting Standards Board

42. Information about material events, opportunities and uncertainties would best be found A. in the management discussion and analysis. B. in the notes to the financial statements. C. on the income statement. D. in the auditor's report.

12-12

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

43. Information about management and director compensation would best be found A. in the notes to the financial statements B. in the auditor's report C. in the cash flow statement D. in the shareholders' information circular

44. Whether by implementing a strategy of differentiation or one of cost advantage, the most common objective of a company is A. maximum return on assets B. positive earnings per share C. maximum return on equity D. Maximize dividend yield

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-03 Explain how a company's business strategy affects financial analysis. Topic: 12-14 Understanding a Company's Strategy

45. Companies that focus on maintaining high profit margins in order to generate higher returns on equity are most likely employing what type of business strategy? A. Cost advantage B. Vertical integration C. Differentiation D. Earnings capitalization

12-13

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

46. Companies that focus on making the most efficient use of assets in order to generate higher returns on equity are most likely employing what type of business strategy? A. Cost advantage B. Vertical integration C. Differentiation D. Earnings capitalization

47. Time series analysis involves examining a company's financial data A. across account classifications. B. and comparing it with other companies. C. across time periods. D. as percentages of net sales or total assets.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-04 Discuss how analysts use financial statements. Topic: 12-15 Financial Statement Analysis

48. Which of the following is not an example of a company comparison analysis? A. Determining how the growth in sales from one company differed from that of another company. B. Comparing growth in sales across different industries. C. Comparing total sales across companies in the same industry for the past three years. D. Determining the growth in sales for a company over a five-year period.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-04 Discuss how analysts use financial statements. Topic: 12-15 Financial Statement Analysis

12-14

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

49. Ratios are useful in explaining the: A. differences between companies B. relationships between financial data C. trends within industries D. reasons for financial performance

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-04 Discuss how analysts use financial statements. Topic: 12-15 Financial Statement Analysis

50. Review of the financial statements revealed the following for Petrolis Sales Inc. Sales $1,250,000, Net income $37,500, Total assets $650,000, Long-term debt $750,000, Interest expense $65,000 and Cost of goods sold $775,000. When preparing common size financial statements interest expense would be shown as A. 9.4% B. 8.4% C. 5.2% D. 10% $65,000/$1,250,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-05 Compute and interpret component percentages. Topic: 12-17 Component Percentages

51. What is the common denominator for each item on the income statement when preparing a common size income statement? A. Net income B. Sales C. Operating profit D. Gross profit

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-05 Compute and interpret component percentages. Topic: 12-17 Component Percentages

12-15

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

52. To see whether a company's cost of sales is increasing proportionately with sales an analyst would use A. raw financial data. B. trend analysis. C. prospective analysis. D. Time series analysis.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-05 Compute and interpret component percentages. Topic: 12-18 Ratio Analysis

53. A common- size analysis of the balance sheet is most likely to signal investors that the company A. is using assets efficiently. B. is becoming more liquid. C. is becoming more leveraged. D. has increased sale.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-05 Compute and interpret component percentages. Topic: 12-18 Ratio Analysis

12-16

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

Consider the following statement of earnings data for Mandrake Mills Inc.

Sales revenue Less: Cost of goods sold Gross profit Selling and administration expense Income before income tax

20X7 $97,300 45,600

20X6 $86,200 53,400

51,700 22,500

32,800 18,300

$29,200

$14,500

54. The common size percentage for selling and administration costs in 20X7 was A. 43.5% B. 21.2% C. 23.1% D. 33%

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-05 Compute and interpret component percentages. Topic: 12-17 Component Percentages

12-17

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

55. Based on common size analysis, which of the following statements is correct A. the increase in sales revenue in 20X7 was caused by higher selling and administrative expenses. B. the increase in gross profit in 20X7 was due to increased sales. C. income before income tax as a percent of sales declined in 20X1. D. the company's cost to sales ratio improved in 20X7.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-05 Compute and interpret component percentages. Topic: 12-17 Component Percentages

56. Which is an appropriate method of preparing a common - size cash flow statement? A. Show each line item on the cash flow statement as a percentage of total assets. B. Show each line item on the cash flow statement as a percentage of net revenue. C. Show each cash inflow on the cash flow statement as a percentage of total cash outflows. D. Show each line item on the cash flow statement as a percentage of total liabilities.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-05 Compute and interpret component percentages. Topic: 12-16 Component Percentages and Ratio Analysis

57. Net sales are $2,700,000, beginning total assets are $750,000, and the asset turnover is 3.0. What is the ending total asset balance? A. $900,000. B. $1,050,000. C. $600,000. D. $1,125,000. Calculation: $2,700,000\ [($750,000 + X)/2] = 3.0.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-18

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

58. Which of the following ratios usually is not considered to be a test of profitability? A. Current ratio. B. Net profit margin. C. Return on assets. D. Earnings per share.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

59. Financial leverage will always be which of the following? A. Positive. B. Negative. C. Either positive or negative. D. Positive, negative, or zero.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

60. Which profit measure is best for assessing how well a firm operates within their industry? A. Earnings before tax B. Gross profit C. Operating profit D. Net income after tax

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-19

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

61. The records of ZZZZ Better Corporation include the following:

Average total assets Average total liabilities Total revenue Total expense (including income tax)

$60,000 45,000 107,600 104,000

What is the return on equity? A. 6% B. 13% C. 16% D. 24% Calculation: ($107,600 - $104,000) ÷ ($60,000 - $45,000) = 24%.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-20

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

62. The records of Twain Company include the following:

Average total assets Average total liabilities Total revenue Total expense (including income tax) Interest expense (included in total expenses) Income tax rate 40%

$60,000 25,000 107,600 104,000 2,000

What is the financial leverage percentage (rounded to the nearest percent)? A. 4% B. 5% C. 7% D. 9% Calculation: [($107,600 - $100,000) ÷ ($60,000 - $25,000)] - [($107,600 - $100,000 + $1,200) ÷ $60,000] = 7%.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-21

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

63. May Company's return on equity was 21% and the financial leverage ratio was 13% (positive). What was the return on assets? A. 8% B. 13% C. 21% D. 34% Calculation: 21% - 8% = 13%.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

64. A common measure of profitability is the A. current ratio. B. Quick ratio. C. return on investment D. debt to total assets ratio.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

65. Which of the following events would likely result in a loss recognized on the write-down of inventories? A. The additional costs resulting from an increase in oil prices caused by a hurricane destroying oil refineries. B. Purchasing another firm for more than the value of the fair market value of the assets. C. The value of perished products for a produce company using the allowance method for inventory D. A drop-in price of raw materials, once scarce, but now in ample supply.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-22

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

66. Which of the following actions would be considered as contributing to low quality of financial reporting? A. A pharmaceutical company maintains research and development expenses even in a depressed economy. B. A company reveals that a major customer may file for bankruptcy. C. A company uses an accelerated depreciation method for delivery vehicles D. A beverage company reduces advertising expense in order to meet earnings forecast for the quarter.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

67. A quality of earnings ratio higher than one is an indicator of which of the following? A. A company's high debt position. B. That fixed assets are the company's most important resources. C. That a company has cash generated by operations higher than the amount of profit. D. That a company has too many fixed assets.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

68. Beta Limited had a current ratio of 0.8:1 before borrowing $50,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Beta's current ratio? A. The ratio remained unchanged. B. The ratio decreased. C. The ratio increased. D. Cannot be determined.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-23

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

69. Compared to an identical company that uses an operating lease, a company that uses a finance lease will most likely produce a reported return on equity (ROE) that A. starts lower but rises during the life of the lease B. starts higher but declines during the life of the lease C. is lower but does not change over the lease period. D. starts higher and remains so during the life of the lease.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

70. Perot Company had profit before interest and taxes of $120,000. Interest expense for the period was $17,000 and income taxes amounted to $28,500. The average shareholders' equity was $680,000. What is Perot's return on equity? A. 10.96% B. 13.46% C. 15.15% D. 17.65% Calculation: ($120,000 - $17,000 - $28,500) ÷ $680,000 = 10.96%.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-50 Appendix 12A: Expanding the DuPont Model—The Scott Formula

12-24

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

71. Lyceum Co. reported profit of $8.3 million, interest expense of $.5 million and they are in a 30% tax rate bracket. Their average total assets are $65.8 million and average shareholders' equity is $48.6 million. What is Lyceum's financial leverage advantage or disadvantage? A. 3.7% B. 3.9% C. 4.0% D. 4.7% Calculation: ($8.3/$48.6) - [($8.3 + $.35)/$65.8] = 3.9%.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

72. In 20X2, C Co's return on owners' equity (ROE) was 45.1%, and return on assets (ROA) was 19.6%. In 20X2, P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%. Which of the following statements is false? A. P Co's return on assets (ROA) was less than half of C Co's ROA. B. P Co's ROE was 222% greater than their ROA while C Co's ROE was only 130% greater than their ROA. This difference is caused by P Co's higher use of debt financing to leverage their assets. C. C Co provided higher positive financial leverage for their shareholders compared to P Co. D. C Co. is considerably more liquid than P Co.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-25

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

73. In 20X2, C Co's gross profit ratio was 70.4% and their profit margin was 18.8%. In 20X2, P Co's gross profit ratio was 58.3% and their profit margin was 8.9%. Which of the following is false? A. C Co's cost of goods sold was a lower percentage of sales than P Co's. B. In 20X2, C Co's profit margin was 111.2% greater than P Co's which would contribute to a higher return on total investment. C. The major reason for P Co's lower profit margin is that their selling, general and administrative expenses were double the percentage of sales compared to C Co's percentage. D. C Co looks to be a better investment than P Co.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

74. A company that is leveraged is one that A. has high earnings per share. B. is partially debt financed. C. equity financed. D. has a high current ratio.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

75. Profit margin is calculated by dividing A. sales by cost of goods sold. B. gross profit by net sales. C. net earnings by shareholders' equity. D. net earnings by net sales.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

12-26

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

76. In 20X2, C Co's receivables turnover ratio and days' sales in receivables was 11.43 times and 31.9 days. In 20X2, P Co's receivables turnover ratio and days' sales in receivables was 9.71 times and 37.6 days. Which of the following statements is false? A. The higher turnover ratio for C Co hurts their liquidity. B. P Co's lower turnover ratio has an inverse relationship to its days' sales tied up in receivables. C. C Co's management has done a better job of managing their receivables. D. C Co appears to be more profitable than P Co.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

77. In 20X2, C Co's return on owners' equity (ROE) was 45.1%, and return on assets (ROA) was 19.6%. In 20X2, P Co's return on owners' equity (ROE) was 29.9% while return on assets was 9.3%. Which of the following statements is false? A. P Co's return on assets (ROA) was less than half of C Co's ROA. B. P Co's ROE was 222% greater than their ROA while C Co's ROE was only 130% greater than their ROA. This difference is caused by P Co's higher use of debt financing to leverage their assets. C. C Co provided higher positive financial leverage for their shareholders compared to P Co. D. C Co. is considerably more liquid than P Co.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

78. Which of the following statements about ROA is true? A. ROA reflects the risk inherent in a company. B. ROA is useful for comparing companies in different industries C. ROA is the most important ratio for an equity investor D. ROA is useful for determining how the company financed its assets

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79. When a company's ROE is greater than its ROA for a given time-period, it could be that A. the company could borrow at an after-tax rate that was higher than the rate earned by investing in assets B. the company could borrow at an after-tax rate that was less than the rate earned by investing in assets. C. the company has no debt D. the level of debt has no impact on the ROA

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

80. A company has a tax rate of 40%. Leverage would be beneficial for the company for each of the following combinations of interest rates and ROA except

A. B. C. D.

Interest rate 4% 6% 14% 16%

ROA 6% 6% 10% 10%

A. Choice A B. Choice B C. Choice C D. Choice D

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81. A company's optimal capital structure occurs when A. ROA is maximized. B. the company can borrow at a rate lower than ROE. C. the company can borrow at a rate lower than its ROA. D. ROE is maximized.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

82. If a firm is using financial leverage successfully what would be the impact of doubling operating earnings? A. The return on equity will increase, but not double B. The return on equity will double C. The return on equity will more than double D. The return on equity will decline by half

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83. All of the following ratios are investor measures of return except A. return on equity. B. return on assets. C. dividend yield. D. price-earnings ratio.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

The following information was taken from the financial statements of C Co for the years 20X2 and 20X1:

Statement of Earnings Net operating revenues Cost of goods sold Gross profit Selling, administrative and general expenses Other operating charges Operating profit Other revenues (expenses) including interest expense $337 million in 20X2 and $277 million in 20X1 Profit before taxes Income tax expense (tax rate 36.3% in 20X2) Profit

20X2

20X1

$19,805

$18,813

6,009 13,796 9,001

5,562 13,251 8,211

813

3,982 (163)

4,967 231

3,819 1,388

5,198 1,665

2,431

3,533

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

Statement of Financial Position Cash and cash equivalents Marketable securities Trade receivables, net Inventories Prepaid expenses and other assets Total current assets Equity method investments Cost method investments Marketable securities and other investments Total investment assets Property, plant and equipment, net Goodwill and other intangible assets Total assets Current liabilities Long-term debt Other liabilities and deferred taxes Total liabilities Total shareholders' equity Total liabilities and shareholders' equity

20X2

20X1 $1,611

$1,648

201

159

1,798

1,666

1,076 1,794

890 2,017

6,480

6,380

6,442

6,291

350

395

2,124

1,863

8,916

8,549

4,267

3,669

1,960

547

$21,623

$19,145

9,856 854 1,400

8,640 687 1,415

12,110 9,513

10,742 8,403

$21,623

$19,145

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

84. Calculate C Co's gross profit ratio for 20X2 and 20X1 respectively. A. 30.3% and 29.6% B. 69.7% and 70.4% C. 20.1% and 26.4% D. 40.6% and 45.7% Calculation: $13,796 ÷ $19,805 = 69.7%; $13,251 ÷ $18,813 = 70.4%.

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85. Calculate C Co's profit margin ratio for 20X2 and 20X1 respectively. A. 69.7% and 70.4% B. 19.3% and 27.6% C. 20.1% and 26.4% D. 12.3% and 18.8% Calculation: $2,431 ÷ $19,805 = 12.3%; $3,533 ÷ $18,813 = 18.8%.

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86. Calculate C Co's fixed asset turnover ratio for 20X2. A. .97 B. 3.79 C. 4.87 D. 4.99 Calculation: $19,805 ÷ [($4,267 + $3,669)/2] = 4.99.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

87. Calculate C Co's return on assets (ROA) for 20X2. A. 11.9% B. 13.0% C. 13.6% D. 17.7% Calculation: [$2,431 + ($337 ´ 63.7%)] ÷ [($21,623 + $19,145)/2] = 13%.

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88. Calculate C Co's return on equity (ROE) for 20X2. A. 25.6% B. 27.1% C. 30.9% D. 31.8% Calculation: $2,431 ÷ [($9,513 + $8,403)/2] = 27.1%.

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89. Calculate C Co's financial leverage and identify whether it was positive or negative. A. 14.1% positive B. 15.2% positive C. 17.8% negative D. 19.9% negative Calculation: 27.1% - 13% = 14.1%.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

90. Calculate C Co's current ratio for 20X2 and 20X1 respectively. A. .54 and .59 B. .60 and .70 C. .66 and .74 D. .63 and .72 Calculation: $6,480 ÷ $9,856 = .66; $6,380 ÷ $8,640 = .74.

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91. Calculate C Co's quick ratio for 20X2 and 20X1 respectively. A. .30 and .32 B. .37 and .40 C. .55 and .64 D. .56 and .54 Calculation: $3,610 ÷ $9,856 = .37; $3,473 ÷ $8,640 = .40.

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92. Calculate C Co's receivables turnover ratio and the days' sales in receivables for 20X2. A. 11.43 times and 31.9 days B. 11.02 times and 33.1 days C. 11.15 times and 32.7 days D. 3.47 times and 105.2 days Calculation: $19,805 ÷ [($1,798 + $1,666)/2] = 11.43; 365 ÷ 11.43 = 31.9.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

93. Calculate C Co's inventory turnover ratio and the days' sales in inventory for 20X2. A. 5.89 times and 62.0 days B. 18.41 times and 19.8 days C. 5.58 times and 65.4 days D. 6.11 times and 59.7 days Calculation: $6,009 ÷ [($1,076 + $890)/2] = 6.11; 365 ÷ 6.11 = 59.7.

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94. Calculate C Co's debt to equity ratio for 20X2 and 20X1 respectively. A. 1.27 and 1.28 B. .79 and .78 C. .56 and .56 D. .66 and .66 Calculation: $12,110 ÷ $9,513 = 1.27; $10,742 ÷ $8,403 = 1.28.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

95. Calculate C Co's times interest earned ratio for 20X2 and 20X1 respectively. A. 11.82 and 17.93 B. 7.21 and 12.75 C. 12.33 and 19.77 D. 11.33 and 18.77 Calculation: ($2,431 + 1,388 + $337) ÷ $337 = 12.33; ($3,533 + $1,665 + $277) ÷ $277 = 19.77.

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96. If a company has a current ratio of 1.3:1, what respective effects will the borrowing of cash by short-term debt and collection of trade receivables have on the ratio? A. Please see the following information:

Short-term Borrowing Increase

Collection of Receivables No Effect

B. Please see the following information:

Short-term Borrowing Increase

Collection of Receivables Increase

C. Please see the following information:

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

Short-term Borrowing Decrease

Collection of Receivables No Effect

D. Please see the following information:

Short-term Borrowing Decrease

Collection of Receivables Decrease

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97. If trade receivables are collected quickly, it may indicate which of the following problems? A. The trade receivables turnover is low. B. The company's credit policies may be overly stringent. C. Credit is often granted to poor credit risks. D. The company is becoming more profitable.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

98. A liquidity ratio measures the A. earnings or operating success of a company over a specific time period. B. ability of the company to survive in the long-term future. C. short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. D. risk of bankruptcy.

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99. An aircraft company would most likely have A. a high inventory turnover. B. a low profit margin. C. no inventory because orders take place before manufacturing. D. a low inventory turnover.

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100. A successful grocery store will most likely have A. a low inventory turnover. B. a high inventory turnover. C. zero profit margin. D. high profit margin.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

101. A company has an average inventory on hand of $40,000 and its average days in inventory are 26.4 days. What is the cost of goods sold? A. $553,030. B. $480,000. C. $1,056,000. D. $486,667. Calculation: Inventory turnover ratio = 365/26.4 = 13.82576 Cost of goods sold: $40,000 ´ 13.82576 = $553,030.

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102. Which of the following is an important measure of the average movement of goods "on and off the shelf" of a company? A. Profit margin. B. Price/earnings ratio. C. Gross inventory ratio. D. Inventory turnover ratio.

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103. Short-term creditors are usually most interested in assessing A. solvency. B. liquidity. C. marketability. D. profitability.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

104. Some of the ratios that are used to determine a company's short-term debt paying ability are A. asset turnover, times interest earned, current ratio, and receivables turnover. B. times interest earned, inventory turnover, current ratio, and receivables turnover. C. times interest earned, current ratio, and inventory turnover. D. current ratio, receivables turnover, and inventory turnover.

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105. A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current liability. Because of this transaction, the current ratio and working capital will A. both decrease. B. both increase. C. remain the same and decrease, respectively. D. increase and remain the same, respectively.

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106. Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company? A. Current ratio B. Dividend yield C. Asset turnover D. Receivables turnover

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

107. A supplier to a company would be most interested in the A. asset turnover ratio. B. profit margin ratio. C. current ratio. D. free cash flow.

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108. Teel Company's working capital was $40,000 and total current liabilities were 1/4 of that amount. What was the current (working capital) ratio? A. 1 to 1 B. 3 to 1 C. 5 to 1 D. 7 to 1 Calculation: $50,000 ÷ $10,000 = 5 to 1.

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109. Wiley Industries reported the following data:

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

Quick Assets Current assets Total Liabilities Average net receivables Beginning inventory Long-term liabilities Net credit sales Cost of goods sold Ending inventory

$55,000 150,000 126,000 107,600 38,000 200,000 126,000 84,000 46,000

What was the current ratio? A. 0.5 to 1 B. 0.75 to 1 C. 1.5 to 1 D. 2.5 to 1 Calculation: $150,000 ÷ ($300,000 - $200,000) = 1.5 to 1.

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110. A general rule to use in assessing the average collection period is that it A. should not exceed 30 days. B. can be any length as long as the customer continues to buy merchandise. C. should not greatly exceed the discount period. D. should not greatly exceed the credit term period.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

111. Hayes Company had an average age of accounts receivable of 25 days and net credit sales of $31,000. Assume a 365-day year. What was the amount of the average net receivables? A. $1,152 B. $2,123 C. $4,000 D. $5,760 Calculation: $31,000 ÷ (365 ÷ 25) = $2,123.

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112. If the average collection period is 45 days, what is the receivables turnover? A. 12.0 times B. 8.1 times C. 18.0 times D. None of these

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113. An increase in the accounts receivable account implies which of the following? A. The firm's sales have decreased relative to the prior year B. The firm's cost of sales has decreased relative to the prior year C. Cash flow from operating activities decreases relative to net income D. Cash flow from operating activities increases relative to net income

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

114. Boxing Cat Company reported the following data at the end of 20X2:

Sales revenue (75% on credit) Expenses Trade receivables, net at December 31, 20X2(a decrease of $4,000 during 20X2 Total assets Shareholders' equity Assume a 365-day year

$300,000 60,000 8,000

200,000 150,000

What was the average number of days to collect receivables during 20X2? A. 14.3 B. 16.2 C. 21.9 D. 36.5 Calculation: 365 ÷ ($225,000 ÷ $10,000) = 16.2.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

115. Which of the following accounting ratios considers the importance of cash flows relating to required interest payments? A. times interest earned ratio B. debt/equity ratio C. cash coverage ratio D. receivables turnover

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Antarctica Cruises Inc. provided the following data for 20X1:

Sales Cost of sales Selling & Admin. expenses Income tax expense and paid Interest expense Interest paid Cash from operating activities Tax rate

$1,250,000 787,500 252,300 27,400 41,000 44,000 246,000 40%

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

116. The cash coverage ratio for 20X1 is closest to A. 7.0 B. 7.69 C. 11.28 D. 5.13 (Cash from operations + interest paid + income tax paid)/interest paid $317,400/$44,000.

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117. The times interest earned ratio for 20X1 is closest to A. 5.80 B. 11.28 C. 5.13 D. 7.69 (Net income + interest expense + income tax expense)/interest expense $210,200/$41,000.

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118. If Antarctica has average total assets of $750,000, what is their total asset turnover? A. 2.69 B. 1.67 C. .85 D. .60

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

119. Bailey Corporation reported the following information for 20X1:

Profit Total assets Total shareholders' equity

$10,000 16,000 8,000

Bailey's debt/equity ratio was A. .33 or 33%. B. 1.0 or 100%. C. 1.25 or 125 %. D. 3.0 or 300%. Calculation: ($16,000 - $8,000) ÷ $8,000 = 1.0.

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120. In 20X2, C Co's total liabilities were $10,742 million and shareholders' equity was $8,403 million. In 20X2, P Co's total liabilities were $16,259 million and their shareholders' equity was $6,401 million. Which of the following statements is false? A. C Co's debt to equity ratio was 1.28 and P Co's was 2.54. B. C Co has only about 56.1% of its assets financed by debt while P Co has about 71.8% of assets financed by debt. C. P Co is a much higher leveraged company providing greater financial risk for investors but potential higher return on owners' investment to its shareholders. D. C Co is more profitable than P Co.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

121. Which of the following ratios is not a test of solvency? A. Debt to equity ratio. B. Times interest earned ratio. C. Cash coverage ratio. D. Earnings per share ratio.

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122. The price that investors are willing to pay for a dollar's worth of earnings is the A. ROE B. EPS C. $1 D. PE ratio

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

123. Consider the following information:

Net earnings Beginning number of shares Ending number of shares Current price per share Dividend per share

$930,000 140,000 160,000 $80.00 $1.20

What is the dividend yield? A. 8.6% B. 50.0% C. 1.5% D. 6.2% Calculation: $1.20/$80.00 = 1.5%.

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P Co's earnings per share ratios were $1.31 and $1.36 respectively for 20X2 and 20X1. P Co's share was trading at $40 7/16 in 20X2 and $34 11/16 in 20X1. They paid cash dividends of $.515 per share in 20X2 and $.46 per share in 20X1. Total shareholders' equity was $6,401 million and $6,936 million in 20X2 and 20011 respectively. The common shares outstanding were approximately 1,519,000,000 and 1,570,000,000 in 20X2 and 20X1 respectively.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

124. Calculate P Co's price earnings ratios for 20X2 and 20X1 respectively. A. 30.9 and 25.5 times B. 3.2% and 3.9% C. 29.7 and 26.5 times D. 29.7% and 26.5% Calculation: $40.4375 ÷ $1.31 = 30.9; $34.6875 ÷ $1.36 = 25.5.

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125. Calculate P Co's dividend yield for 20X2 and 20X1 respectively. A. 3.5% and 3.6% B. 39.3% and 33.8% C. 1.3% and 1.3% D. 38.6% and 34.5% Calculation: $.515 ÷ $40.4375 = 1.3%; $.46 ÷ $34.6875 = 1.3%.

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126. Calculate P Co's dividend payout for 20X2 and 20X1 respectively. A. 38.6% and 34.5% B. 39.3% and 33.8% C. 1.3% and 1.3% D. 3.5% and 3.6% Calculation: $.515 ÷ $1.31 = 39.3%; $.46 ÷ $1.36 = 33.8%.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

127. Calculate P Co's book value per share in 20X2 and 20X1 respectively. A. 4.14 and cannot compute 20X2's book value B. 4.14 and 4.49 C. 4.21 and 4.42 D. 4.21 and cannot compute 20X2's book value Calculation: $6,401 ÷ 1,519 = 4.21; $6,936 ÷ 1,570 = 4.42.

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128. The Mable Company had profit of $47,500 and earnings per share of $3.17 during 2018. On December 31, 2018, the shares had a market price of $18.50 per share. What is Mable's price/earnings ratio? A. 0.17 B. 5.84 C. 8.11 D. 25.70 Calculation: $18.50 ÷ $3.17 = 5.84.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

129. Mattell Company paid out $2.30 in dividends per share during 20X2. The market price of the share on December 31, 20X2 was $21.00 per share. There were 15,000 shares outstanding for the entire year. What was the dividend yield as of December 31, 20X2? A. 9.13% B. 10.95% C. 16.43% D. 913.04% Calculation: $2.30 ÷ $21.00 = 10.95%.

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130. If the components of price/earnings ratio are inverted, the resulting percent is referred to as which of the following? A. Multiple. B. Dividend yield ratio. C. Book value per share. D. Capitalization rate.

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

131. At the end of 20X2, EZ Storage Company reported 15,000 outstanding common shares that were trading at $40/share. Total liabilities were $440,000 and total assets were $860,000. The company had no preferred shares. What was the book value per common share? A. $13.90 B. $14.00 C. $28.00 D. $29.00 Calculation: ($860,000 - $440,000) ÷ 15,000 = $28.00.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-41 Market Ratios

132. Strait Company has outstanding shares as follows: 16,000 common shares and 5,000 preferred shares. What is the number of shares that should be used in the denominator to compute earnings per share? A. 5,000 B. 16,000 C. 11,000 D. 21,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-41 Market Ratios

133. Which of the following regarding book value per common share is true? A. It is not widely used in assessing the future dividend potential of the corporation. B. It is a good measure of management performance. C. It is usually greater than the market value per share. D. It is a measure of liquidity.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-41 Market Ratios

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134. The ratio that is calculated by dividing cash dividends declared on common shares by net earnings is called the: A. dividend yield ratio. B. earnings per share ratio. C. common dividend ratio. D. payout ratio.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-41 Market Ratios

135. Which of the following circumstances might indicate that management is manipulating the allowance for doubtful accounts? A. A company tightens its credit standards and the allowance account increases B. A company lowers its credit standards and the allowance account decreases C. A company tightens its credit standards and the allowance account decreases D. A company lowers its credit standards and the allowance account increases

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-48 Interpreting Ratios and Other Analytical Considerations

136. Which item may be of concern when analyzing cash flow from operating activities? A. Repayment of debt B. Decreasing accounts receivable C. Increasing inventories D. Payments of dividends

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137. Changes in the total asset turnover ratio may indicate changes in: A. financing decisions B. Cost structure C. Product profitability D. Sales

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Short Answer Questions 138. Indicate the proper category for each ratio. Primary Category Test of: A. Profitability B. Liquidity C. Solvency D. Market E. Miscellaneous ratio Ratio ____ 1. Earnings per share ____ 2. Current ratio ____ 3. Debt/equity ratio ____ 4. Dividend yield ratio ____ 5. Receivables turnover ratio ____ 6. Return on equity ____ 7. Price/earnings ratio ____ 8. Creditors' equity to total equities ____ 9. Profit margin ___ 10. Inventory turnover ratio ___ 11. Owners' equity to total equities ___ 12. Quick ratio ___ 13. Return on assets ___ 14. Financial leverage ___ 15. Book value per common share ___ 16. Quality of earnings ___ 17. Fixed asset turnover ratio ___ 18. Cash coverage ___ 19. Cash ratio ___ 20. Times interest earned

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

(1) A, (2) B, (3) C, (4) D, (5) B, (6) A, (7) D, (8) C, (9) A, (10) B, (11) C, (12) B, (13) A, (14) A, (15) E, (16) A, (17) A, (18) C, (19) B, (20) C

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Learning Objective: 12-07 Compute and interpret asset activity ratios. Learning Objective: 12-08 Compute and interpret liquidity ratios. Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-19 Profitability Ratios Topic: 12-33 Liquidity Ratios Topic: 12-37 Solvency Ratios Topic: 12-41 Market Ratios

139. For each of the following items indicate where you would most likely find the information Statement of financial position. B. Statement of earnings C. Statement of stockholders' equity. D. Statement of cash flows. E. Notes to the financial statements. F. Auditor's report. G. Management's discussion and analysis. H. The information circular

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Details concerning the compensation of the CEO, CFO, and other key executive officers Detailed information about the term, cost and maturity of debt. Changes to the company's equity accounts. An unqualified opinion. Assets. Attestation to the fairness of financial statements. Discussion of the company's liquidity. Cash inflows from investing activities. A breakdown of sales increases into price and volume components. Summary of significant accounting policies.

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Please review the following information:

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

details of the compensation of the CEO, CFO, and other key executive officers Detailed information about the term, cost and maturity of debt. Changes to the company's equity accounts. An unqualified opinion. Assets. Attestation to the fairness of financial statements. Discussion of the company's liquidity. Cash inflows from investing activities. A breakdown of sales increases into price and volume components. Summary of significant accounting policies.

H E C F A F G D G E

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140. Match the characteristic that is reflected best by the indicators. Characteristic A. Solvency B. Global performance C. Market performance D. Profitability E. Liquidity Indicator ____ 1. Working capital ____ 2. Debt/equity ratio ____ 3. Earnings per share ____ 4. Return on assets ____ 5. Current ratio ____ 6. Price/earnings ratio ____ 7. Financial leverage ____ 8. Quick ratio (1) E, (2) A, (3) D, (4) D, (5) E, (6) C, (7) D, (8) E

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141. Match the ratio computation with the ratio. Ratio Computation A. Profit ÷ Net sales revenue B. Net credit sales ÷ Average net receivables C. Return on equity - Return on assets D. Sales revenue ÷ Total operating expenses E. Total liabilities ÷ Shareholders' Equity F. Market price per share ÷ EPS G. Profit ÷ Average shareholders' equity H. Creditors' equity ÷ Total equities I. Income tax expense ÷ Pretax income J. Quick assets ÷ Current liabilities K. Sales revenue ÷ Total assets L. Dividends per share ÷ Market price per share M. Shareholders' equity ÷ Total equities N. Cost of goods sold ÷ Average inventory O. (Income + After-tax interest expense) ÷ Total assets P. Current assets ÷ Current liabilities Q. Profit ÷ Average number of shares of common share outstanding R. (Cash + Cash equivalents) ÷ Current liabilities S. Cash Flows from Operating Activities ÷ Profit T. (Profit + Interest + Income Tax Expense) ÷ Interest Expense U. Net Sales Revenue ÷ Net Fixed Assets V. Cash Flows from Operating Activities (before interest and tax expense) ÷ Interest Paid W. Not given above. Ratio Designation ____ 1. Return on equity ____ 2. Return on assets ____ 3. Financial leverage ____ 4. EPS ____ 5. Profit margin ____ 6. Current ratio ____ 7. Quick ratio ____ 8. Receivables turnover ratio ____ 9. Inventory turnover ratio ___ 10. Debt/equity ratio ___ 11. Owners' equity to total equities ___ 12. Creditors' equity to total equities ___ 13. Price/earnings ratio ___ 14. Dividend yield ratio

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___ 15. Book value per common share ___ 16. Cash coverage ratio ___ 17. Cash ratio ___ 18. Quality of earnings ___ 19. Times interest earned ___ 20. Fixed asset turnover ratio (1) G, (2) O, (3) C, (4) Q, (5) A, (6) P, (7) J, (8) B, (9) N, (10) E, (11) M, (12) H, (13) F, (14) L, (15) W, (16) V, (17) R, (18) S, (19) T, (20) U

142. Complete the following statement of earnings (both dollar amounts and component percentages):

Amount Sales revenue Cost of goods sold Gross margin Operating expenses Interest expense Profit (before income tax) Income tax expense (rate 20%) Profit

Component percentage

% 40%

$120,000 2%

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Please review the following information:

Amount Sales revenue Cost of goods sold Gross margin Operating expenses Interest expense Profit (before income tax) Income tax expense (rate 20%) Profit

$200,000 $80,000 $120,000 $101,000 $4,000 $15,000

Component percentage 100% 40% 60% 50.5% 2% 7.5%

$3,000

1.5%

$12,000

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Hard Learning Objective: 12-05 Compute and interpret component percentages. Topic: 12-17 Component Percentages

143. List four categories of accounting ratios described in the text. 1. Profitability; 2. Liquidity; 3. Solvency; 4. Market tests (Note: The student could include miscellaneous ratios instead of one of the above).

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 12-05 Compute and interpret component percentages. Topic: 12-16 Component Percentages and Ratio Analysis

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

144. The following financial data are available for Schultz Company:

Operating profit Profit Earnings per share Dividends paid per share Average common shareholders' equity Average total assets Current market price per share Book value per share

$236,000 196,300 2.45 1.25 985,000 1,870,000 24.50 12.30

Compute the following ratios: 1. Return on equity 2. Price/earnings ratio 3. Dividend yield 1. Return on equity 19.93% ($196,300/$985,000) 2. Price earnings ratio 10 ($24.50/$2.45) 3. Dividend yield 5.10% ($1.25/$24.50)

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-15 Financial Statement Analysis Topic: 12-33 Liquidity Ratios

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

145. The following data were reported for Marcellan Company:

Profit Total dividend declared and paid on common stock Common stock outstanding, par $10 Market price Cash flows from operating activities

Compute the following ratios:

(a) (b) (c)

Dividend yield Price/earnings ratio Quality of earnings

(a) 3.0% (.60/20) (b) EPS = 275,000/175,000 = $1.57 PE = 20/1.57 = 12.7% (c) $280,000/275,000 = 1.02

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-19 Profitability Ratios Topic: 12-41 Market Ratios

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$275,000 0.60 per share $1,750,000 20.00 per share $280,000

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

146. Calbee Company reported the following data at year-end:

Total shareholders' equity Current liabilities Total assets Current assets Common stock (par $10)

(a) (b) (c) (d) (e)

$200,000 75,000 350,000 80,000 125,000

Compute the debt/equity ratio: _____ Compute shareholders' equity to total equities: _____ Compute creditors' equity to total equities: _____ Compute the current ratio: _____ Compute the working capital: _______

(a) ($350,000 - $200,000)/$200,000 = 75% (b) $200,000/350,000 = 57.1% (c) $150,000/350,000 = 42.9% (d) $80,000/75,000 = 1.07 to 1 (e) 80,000-75,000 = 5,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Learning Objective: 12-08 Compute and interpret liquidity ratios. Topic: 12-19 Profitability Ratios Topic: 12-37 Solvency Ratios

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147. The following data were shown in the records of Morgan Company at the end of 20X2:

Quick assets Current assets Average net receivables Average inventory Current liabilities Net credit sales Cost of goods sold Assume a 365-day year

$180,000 225,000 10,000 42,000 50,000 120,000 84,000

Compute the following ratios (a) Quick ratio: (b) Current (working capital) ratio: (c) Receivable turnover: (d) Inventory turnover: (e) Average age of receivables (f) Average days' supply in inventory (a) $180,000/$50,000 = 3.6 to 1 (b) $225,000/$50,000 = 4.5 to 1 (c) $120,000/$10,000 = 12 times (d) $84,000/$42,000 = 2 times (e) 365/12 = 30 days (f) 365/2 = 183 days

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

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148. The following data were available for Lorn Enterprise: Sales revenue, $225,000 (including 75,000 cash sales) Cost of goods sold, $175,000 Average inventory (per month), $20,000 Average monthly balance in trade receivables, $20,000 Assume a business year of 365 days and calculate the following: (a) Inventory turnover ______________ (b) Days' supply in inventory ___________ (c) Receivables turnover ___________ (d) Average number of days to collect receivables ________________ (e) Gross profit __________ (a) $175,000/20,000 = 8.75 times (b) 365/8.75 = 42 days (c) $150,000/$20,000 = 7.5 times (d) 365/7.5 = 49 days (e) 225000-175000=50,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

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149. Slow Corporation reported the following data for the year ended December 31, 20X3:

Net sales revenue Profit Interest expense (net of tax) Total assets Shareholders' equity Net fixed assets Shares of common stock outstanding Market value per share

$400,000 25,000 3,000 200,000 160,000 100,000 15,000 shares $16.00

Compute the following ratios:

(a) (b) (c) (d) (e) (f) (g) (h)

Profit margin Return on assets Return on equity Earnings per share Price/earnings ratio Debt/equity ratio Financial leverage percent Fixed asset turnover ratio

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(a) $25,000/$400,000 = 6.25% (b) ($25,000 + $3,000)/$200,000 = 14% (c) $25,000/$160,000 = 15.6% (d) $25,000/15,000 shares = $1.67 (e) $16/$1.67 = 9.58 (f) $40,000/$160,000 = 25% (g) 15.6% - 14% = 1.6% (positive) (h) $400,000/100,000 = 4 times

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Learning Objective: 12-08 Compute and interpret liquidity ratios. Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-19 Profitability Ratios Topic: 12-37 Solvency Ratios Topic: 12-41 Market Ratios

150. Custer Corporation reported the following information related to its common share (par $10) outstanding and profit:

Total shareholders' equity (no preferred stock) Current market price per share of the common stock Dividends declared and paid during 20X6 Balance in the common stock account Profit

(a) (b) (c)

$125,000 $40.00 $10,000 $40,000 $35,000

The price/earnings ratio related to current operations was _____. The dividend yield ratio was _____. The book value per share of common stock was $ _____.

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(a) $40/[($35,000)/($40,000/$10)] = 4.57 (b) ($10,000/4,000 shares)/$40 = 6.25% (c) $125,000/4,000 shares = $31.25

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-41 Market Ratios

151. At the end of 20X3, Anderson Corporation reported a return on assets of 16%; net income of $42,000; total assets of $365,000, and total liabilities of $165,000. The financial leverage percent was ___________. $42,000/($365,000 - $165,000) = 21%; 21% - 16% = 5% positive

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

152. At the end of 20X2, Wild Corporation reported net income of $70,000, gross sales revenue of $1,525,000, and sales returns of $125,000. The profit margin was ______%. $70,000/($1,525,000 - $125,000) = 5%

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

153. Howard Corporation reported a quick ratio of 1.75, current assets of $50,000 and a current (working capital) ratio of 2. (a) The total amount of quick assets was $_______. (b) What is another name for the quick ratio? ___________ (c) Describe what type of assets are considered quick assets and give some examples. (d) How does the quick ratio compare to the current ratio? (a) $50,000/2 = $25,000 current liabilities $25,000 ´ 1.75 = $43,750 quick assets (b) Acid-test ratio (c) Quick assets are assets able to be readily converted to cash, usually at their book values. Quick assets often include cash, short-term investments, and net accounts receivable. (d) The quick ratio test of liquidity is a more stringent test of short-term liquidity than the current ratio. It compares quick assets (cash or one step away from cash) to total current liabilities. The quick ratio is usually less than the current ratio for a company.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

154. The records of Sage Company showed the following:

Assets Liabilities Shareholders' equity* Revenues Expenses** Interest expense Profit

$230,000 130,000 100,000 $100,000 (81,000) (2,000) $17,000

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*10,000 shares outstanding; current market price, $30 **Including income tax; income tax rate, 30%

(1) (2) (3) (4)

The return on assets is _____ %. The return on equity is _____ %. The financial leverage factor is _____ %. Is the financial leverage positive or negative? _____

(1) $17,000 + ($2,000 ´ .70)/$230,000 = 8% (2) $17,000/$100,000 = 17% (3) 17% - 8% = 9% (4) Positive

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

155. The 20X2 financial statements of Companies A and B showed the following:

Item Net sales revenue Profit margin Total assets Financial leverage Interest expense (net of tax)

Company A Company B $150,000 $200,000 6% 5% $40,000 $80,000 +4% +3% $1,000 $800

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Part A: For each company, compute the items listed in the following tabulation. a. b. c. d.

Item Reported profit Return on assets Return on equity Amount of owners' equity

Company A Company B $ % % $

Part B: Which company do you believe is a better investment? Justify your response. Part A:

a. b. c. d.

Reported profit Return on assets Return on equity Amount of owners' equity

Company A $9,000

Company B $10,000

25%

13.5%

29%

16.5%

$31,034

$60,606

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$ % % $

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

Part B: Company A appears to be a better investment. Company A's return on equity and return on assets are both higher than Company B's. Also, financial leverage is greater for Company A. The fact that Company A's profit is lower is not necessarily a critical factor. However, this information is only for one year. It would be necessary to obtain more financial history, as well as industry data, prior to making a final decision.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Topic: 12-19 Profitability Ratios

156. Night Corporation gathered the following data at the end of the accounting period, December 31, 20X4:

Profit Net sales revenue Interest expense Total liabilities Shareholders' equity (50,000 shares outstanding) Average income tax rate Dividends declared and paid during 20X4 Market price per share of stock at year end

$60,000 1,200,000 25,000 200,000 300,000 40% 22,500 $9.00

(a) Based on the above information, prepare an analysis by computing the following:

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(1) (2) (3) (4) (5) (6) (7)

Profit margin: _____ %. Return on equity: _____ %. Earnings per share: $ _____. Dividend yield ratio: _____ %. Price/earnings ratio: _____. Return on assets: _____ %. Financial leverage: _____ %.

(b) Your interpretation of the financial leverage is: (a) (1) $60,000/$1,200,000 = 5% (2) $60,000/$300,000 = 20% (3) $60,000/50,000 shares = $1.20 (4) ($22,500/50,000) ÷ $9 = 5% (5) $9.00/$1.20 = 7.5 (6) [$60,000 + ($25,000 ´.60)]/$500,000 = 15% (7) 20% - 15% = 5% (b) The advantage is favourable to the shareholders if the ratio is positive, and it is unfavourable to the shareholders if the ratio is negative because of the difference between profit on total assets and the cost of debt (interest expense net of income tax). For Night Corporation, the company's shareholders are benefiting from financial leverage because the cost of borrowing is less than the return to the shareholders.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Learning Objective: 12-08 Compute and interpret liquidity ratios. Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-19 Profitability Ratios Topic: 12-37 Solvency Ratios Topic: 12-41 Market Ratios

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157. The following data were reported by Cute Button Company at year-end 2019:

Total assets Quick assets Non-current assets Current liabilities Long-term liabilities Common stock (par $10) Total owners' equity

$525,000 105,000 375,000 75,000 75,000 170,000 375,000

Compute the following ratios for Cute Button (a) Debt to equity ratio: (b) Current (working capital) ratio: (c) Quick ratio: (d) Which, if any, of the above are liquidity ratios? (e) Which, if any, of the above are solvency ratios? (a) $150,000/$375,000 = .40 or 40% (b) $150,000/$75,000 = 2.0 to 1. (c) $105,000/$75,000 = 1.4 to 1. (d) Current ratio and quick ratio. (e) Debt to equity

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-07 Compute and interpret asset activity ratios. Learning Objective: 12-08 Compute and interpret liquidity ratios. Topic: 12-33 Liquidity Ratios Topic: 12-37 Solvency Ratios

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158. The following return on investment ratios were computed for ET Company:

Return on assets Return on equity

20X1 20X2 20X3 20X4 12% 15% 15% 18% 15% 15% 11% 20%

(a) Financial leverage percent for each year was:

20X1: _____ 20X2: _____ 20X3: _____ 20X4: _____

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(b) Explain briefly the shareholders' advantage or disadvantage for each year: 20X1: 20X2: 20X3: 20X4: (a) 20X1: 15% - 12% = +3% positive 20X2: 15% - 15% = -0- neither 20X3: 11% - 15% = (4%) negative 20X4: 20% - 18% = +2% positive (b) 20X1: Positive leverage of 3% means the shareholders gained because of the use of debt. 20X2: The return on assets increased to 15% but the return on equity did not increase. Shareholders did not gain from the use of debt because leverage was zero. 20X3: Negative leverage of 4% means the shareholders lost because of the use of debt. 20X4: The increase in the return on assets and the positive leverage of 2% are both favourable to shareholders.

159. Smith Company gathered the following information for 20X2:

Total sales revenue (65% on credit) Cost of goods sold Sales returns and allowances (on credit) Trade receivables at end of 20X2 ($30,000 increase during 20X2) Allowance for doubtful accounts: Beginning of 20X2 End of 20X2 Merchandise inventory at end of 20X2 ($10,000 decrease during 20X2) Assume 365 days in the year

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$432,000 231,000 44,000 100,000 5,000 7,000 28,000

Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

(a) (b) (c) (d)

Receivable turnover Average number of days to collect Inventory turnover Average number of days' supply of inventory

(a) [$432,000 ´ 65%) - $44,000]/{[($100,000 - $7,000) + ($70,000 - $5,000)]/2} = 3.0 (b) 365 days/3 = 122 average days' supply (c) $231,000/[($28,000 + $38,000)/2] = 7 times (d) 365 days/7 = 52 average days' supply.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

160. Red Company reported total shareholders' equity of $500,000, which included a common share account balance of $200,000 (40,000 shares) at the end of 20X2. Compute the book value per common share assuming the company had only common shares. The book value per common share was $________. $500,000/40,000 = $12.50/share

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-41 Market Ratios

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

161. Ricon Company had the following data available from the statements of financial position and income statements:

Current assets: Trade receivables Cash Inventory Total assets Current liabilities Shareholders' equity: Common stock, par $5 Retained earnings (including profit for 20X2 and 20X3, respectively) Total sales revenue Credit sales Cost of goods sold Income (before taxes) Income tax (20%)

Ratio

20X2 $4,000 7,000 10,000 50,000 15,000

20X3 $6,000 8,000 12,000 60,000 20,000

20,000 20,000 6,000 11,000 80,000 100,000 26,000 30,000 60,000 80,000 5,000 7,000 1,000 1,400

20X2 20X3

a. Current ratio b. Quick ratio c. Earnings per share of common stock

(a) 20X2: $21,000/$15,000 = 1.4 to 1. 20X3: $26,000/$20,000 = 1.3 to 1. (b) 20X2: $11,000/$15,000 = .73 to 1. 20X3: $14,000/$20,000 = .70 to 1. (c) 20X2: (5,000 - 1,000)/(20,000/5) = $1.00 20X3: (7,000 - 1,400)/(20,000/5) = $1.40

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-06 Compute and interpret profitability ratios. Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-19 Profitability Ratios Topic: 12-33 Liquidity Ratios

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

162. Indicate the effect of each item on the ratios given below in the following manner: if an item would cause an increase in the ratio, place a check in the + column; if a decrease, place a check in - column; and if no change, check the 0 column. Each item is independent of the others.

Ratio

Ratio Value Before the Item Occurred

Item

Effect on Ratio

+ A

Current Ratio

Quick or acid test

Receivable turnover

Earnings per share

Current ratio

Quick or acid test

Current ratio

3 to 1 Borrowed funds by issuance of bonds maturing at the end of 15 years 1 to 1 Borrowed funds by discounting of 60-day customer note received that has been held for 1 week. Cash receiver was less than the maturity value of the note 12 times per year All sales prior to change were on "net due in 30 days" basis; after change, there are only "net due in 60 days" terms $2 Issued a 50% stock dividend 4 to 1 Sold a short-term investment and a gain is recorded 1.4 to 1 Sold marketable securities held a shortterm investment at 10% less than their carrying value 3 to 1 Sold short-term investments at book value for cash

(a) + (current assets increased) (b) - (decrease quick assets by the difference) (c) - (amount of average accounts receivable increased) (d) - (increases shares outstanding) (e) + (increase in current assets) (f) - (decrease in quick assets) (g) -0- (current assets are unchanged)

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163. Dorian's Donuts Company computed the following ratios for a two-year period:

a. b. c. d. e.

Ratio 20X1 20X2 Current ratio 1.3 to 1 .6 to 1 Return on equity 25% 16% Quality of earnings 1.7 .5 Cash coverage ratio 346 122 Profit margin 6% 4%

Required: Comment on the trend of each of the ratios from 20X1 to 20X2. State concerns or possible implications for the future of each. (a) The current ratio has decreased to half of the 20X1 ratio. The company's liquidity is taking a downturn. Currently due bills may not be able to be paid in a timely manner. (b) The ROE decreased. The profitability of the company may be of concern. (c) The quality of earnings ratio went from above one to below one. The 20X2 earnings are of lower quality than those of 20X1. (d) Cash coverage has plummeted. One might be concerned about the declining amount of cash from operations to pay interest payments. (e) Since the profit margin declined from 20X1 to 20X2, less of each sales dollar is realized in income. Note: All these ratios deteriorated. Overall, the company is experiencing unfavourable trends.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 12-07 Compute and interpret asset activity ratios. Topic: 12-33 Liquidity Ratios

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

164. Financial ratio data is presented d below for Manchester Manufacturing Inc.

Manchester Manufacturing Inc. Ratios Industry average 20X9 20X8 20X7 Current 1.20 1.18 1.20 1.35 Quick 0.20 0.18 0.21 0.26 Cash flow liquidity 0.50 (0.11) (0.09) (0.05) Average collection period 4 days 9 days 8 days 6 days Days inventory held 75 days 106 days 99 days 90 days Days payable outstanding 10 days 11 days 12 days 8 days Fixed asset turnover 11.30 8.84 8.89 8.95 Total asset turnover 2.50 2.20 2.27 2.42 Debt to equity 3.50 3.65 3.17 2.35 Times interest earned 2.40 1.72 2.00 2.23 Gross profit margin 23.10% 21.21% 22.39% 23.52% Operating profit margin 2.00% 3.05% 2.86% 2.52% Net profit margin 1.10% 0.89% 1.00% 0.97% Cash flow margin 4.30% (5.31%) (5.15%) (4.48%) Return on equity 11.04% 9.14% 9.51% 7.88% Ratio

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Chapter 12 - Communicating Accounting Information and Analyzing Financial Statements

Required: Prepare a list of strengths and weaknesses for the firm after analyzing the above ratios. Strengths: 1. Good control of operating expenses; operating profit margin is increasing. 2. Return on equity has increased because the company is using debt successfully. Weaknesses: 1. Short-term liquidity is deteriorating. 2. Current and quick ratios are declining and now below industry average. 3. Cash flows from operations are negative. 4. Average collection period is increasing and above industry average. 5. Inventory is a serious concern as the number of days held has grown to a much higher amount than the industry. 6. Number of days to pay suppliers is increasing and now above industry average. 7. Fixed and total asset turnovers are declining indicating fewer sales and/or increased capital expenditures. 8. Debt is increasing and above industry average implying more risk in firm. 9. Gross profit margin is on a downward trend and below industry average; possibly a result of price reductions or increased cost of goods sold. 10. Return on equity is declining in 20X9 and below industry average.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 12-06 Compute and interpret profitability ratios. Learning Objective: 12-07 Compute and interpret asset activity ratios. Learning Objective: 12-08 Compute and interpret liquidity ratios. Learning Objective: 12-09 Compute and interpret solvency ratios. Topic: 12-19 Profitability Ratios Topic: 12-33 Liquidity Ratios Topic: 12-37 Solvency Ratios Topic: 12-41 Market Ratios

12-85

Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Chapter 13 Reporting and Interpreting Investments in Other Corporations

True / False Questions 1. Investments in bonds intended to be sold before they reach maturity should be reported under the market value method. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 13-01 Analyze and report investments in debt securities using the amortized cost and fair value methods. Topic: 13-05 Passive Investments in Debt Securities

2. Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security. TRUE

3. If a bond is bought at a discount, then interest revenue will be less than the cash payment. FALSE

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

4. If a bond is bought at a premium, the amortized book value of the bond investment will decrease as the bond matures. FALSE

5. Unless a bond is purchased at par, its carrying value will change through the life of the bond. TRUE

6. The number of shares owned by an investor does not impact how the investment is treated by accountants. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-22 Investments for Significant Influence: Equity Method

7. Mutual funds trade stock and bond investments actively and recognize unrealized gains and losses on their statement of earnings. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 13-02 Analyze and report passive investments in equity securities using the fair value method. Topic: 13-12 Passive Investments in Equity Securities

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

8. Held-to-maturity bond investments should be reported on the statement of financial position at fair value. FALSE

9. Investments classified other than as held-to-maturity bond investments should be reported on the statement of financial position at fair value. TRUE

10. A realized gain or loss is reported on the income statement when a fair value adjustment is made. FALSE

11. An unrealized holding gain is reported on the income statement when the fair value of an available-for-sale security exceeds its cost. FALSE

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

12. An unrealized holding gain is reported within other comprehensive income when the fair value of a trading security exceeds its cost. FALSE

13. An unrealized holding loss is not reported on the statement of earnings when the fair value of a trading security is less than its cost. FALSE

14. A realized gain or loss is reported on the income statement when a trading security is sold. TRUE

15. A decline in the fair value of the available-for-sale portfolio reduces assets and net income. FALSE

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

16. An increase in the fair value of the trading securities portfolio increases both assets and comprehensive income but not net income. TRUE

17. The sale of a stock from the available-for-sale portfolio creates a gain or loss on the statement of earnings based on the difference between the stock's original cost and its selling price. TRUE

18. The only income reported on the income statement for a stock from the available-for-sale portfolio prior to its sale is dividend revenue. TRUE

19. The equity method is required to be used when an investor has the ability to exert significant influence over the investee. TRUE

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

20. Use of the equity method is required for investments between 20 and 50% of a company's common stock regardless of the investor's ability to influence the investee. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-23 Recording Investments under the Equity Method

21. The equity method requires the recognition of investment revenue for dividends received. FALSE

22. Ocean Corporation owns 30% of Woods Corp. for which they paid $5.5 million and uses the equity method to account for the investment. Woods Corp. paid a $100,000 dividend; the investment in Woods Corp. account will decrease by $30,000, which is Ocean's proportionate share of the dividend. TRUE

23. An investment accounted for under the equity method would record a reduction in the investment account for the proportionate share of the investee's reported net loss. TRUE

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

24. An investment accounted for under the equity method would record an increase in the investment account and create net earnings in an amount equal to the proportionate share of the investee's reported net earnings. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-23 Recording Investments under the Equity Method Topic: 13-27 Reporting Investments under the Equity Method

25. An investment accounted for under the equity method is always reported on the statement of financial position fair value. FALSE

26. When an investment accounted for under the equity method is sold, the gain or loss reported on the statement of earnings is the difference between the selling price and its original cost. FALSE

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

27. Any unrealized gains or losses on trading securities would have to be added back to or deducted from net earnings on the statement of cash flows under the indirect method of determining cash flows from operating activities. TRUE

28. The extent of influence and control over another company is a critical factor in determining the proper method of accounting for a long-term investment in the common stock of another company. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-28 Controlling Interests: Mergers and Acquisitions

29. Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million. Allison's total assets at fair value equaled $12.5 million and Allison had liabilities at fair value equal to $3.4 million. Madison will report goodwill of $0.9 million. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-30 Recording a Business Acquisition

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

30. When the acquiring company purchases 100% of the investee's stock, the investee's assets and liabilities will be consolidated with those of the acquiring company at their fair market values. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-31 Reporting for the Combined Companies

31. Subsequent to a merger, any revenues and expenses of the subsidiary would be combined with those of the parent company on the consolidated statement of earnings. TRUE

32. Goodwill is reported on a consolidated statement of financial position only if it was acquired in the merger or acquisition. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-30 Recording a Business Acquisition

33. Goodwill can be reported when it is internally developed through strong marketing efforts FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-30 Recording a Business Acquisition

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

34. The assets of the subsidiary are depreciated and amortized over their useful lives as a part of the consolidation process. TRUE

Multiple Choice Questions 35. Which of the following is the best description of investments in trading securities? A. Investments in bonds that management intends to hold to maturity. B. Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future. C. Investments in more than fifty percent of the voting stock of another company. D. Investments that provide the investor significant influence over the investee, but not control over the investee.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 13-02 Analyze and report passive investments in equity securities using the fair value method. Topic: 13-12 Passive Investments in Equity Securities

36. Piano Company owns 55% of the voting common stock shares of Keys Corporation. Which of the following is true? A. The investment would be accounted for using the equity method. B. The investment would be accounted for by consolidation. C. The investment would be accounted for under the market value method. D. The investment would be accounted for under the amortized cost method.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 13-01 Analyze and report investments in debt securities using the amortized cost and fair value methods. Topic: 13-04 Investments in Shares for Control

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

37. Under the amortized cost model, holding gains are A. recognized in net income. B. the recognition depends on management's intention. C. recognized in other comprehensive income. D. are not recognized.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 13-01 Analyze and report investments in debt securities using the amortized cost and fair value methods. Topic: 13-05 Passive Investments in Debt Securities

38. Under the fair value through other comprehensive income model, investments are reported as long term assets A. depending on the value and risk of the investment. B. depending on the balance in the accumulated comprehensive income account. C. only if the intent is to sell before maturity. D. depending on management intent.

39. The premium or discount on bonds accounted for under the amortized cost method is A. amortized over the expected holding period. B. amortized over the life of the bond. C. not amortized. D. recognized in revenue.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

40. Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 20X0. The bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false? A. Since the bonds were issued at par value, the cash interest will be the same as interest revenue. B. The bonds will earn $75,000 of interest by December 31, 20X0. C. The bond investment must be accounted for using the fair value approach. D. Since they were classified as held-to-maturity, the company would recognize no unrealized gains or losses on the bonds over their lifetime.

41. Healthy Foods Corp. purchased $1,000,000 of bonds of another corporation at 105. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is false? A. Since the bonds were issued at a premium, the cash interest will be greater than interest revenue. B. Since the bonds were issued at a premium, the book value of the bond investment will decrease over time. C. The bond investment must be accounted for using the held-to-maturity classification. D. The company would recognize unrealized gains or losses on the bonds under the fair value approach within the statement of earnings.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

42. Applesnax Corp. purchased $1,000,000 of bonds of another company at 96. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is correct? A. Since the bonds were purchased at a discount, the book value of the bond investment will decrease over time. B. Since the bonds were purchased at a discount, the book value of the bond investment will increase over time. C. The bond investment must be accounted for using the trading securities classification. D. The company would recognize unrealized gains or losses on the bonds.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 13-01 Analyze and report investments in debt securities using the amortized cost and fair value methods. Topic: 13-05 Passive Investments in Debt Securities

43. Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment. Which of the following classifications should be used by Idaho Company in accounting for the investment? A. Trading securities. B. Held-to-maturity. C. Available-for-sale. D. Consolidation.

44. Comprehensive income is included as part of A. retained earnings. B. common shares. C. net income. D. none of the choices.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

45. Which of the following is the best description of investments in available-for-sale securities? A. Investments in bonds that management intends to hold to maturity. B. Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future. C. Investments in more than fifty percent of the voting stock of another company. D. Investments in securities that are accounted for under the market value method other than trading securities and held-to-maturity investments.

46. On its December 31, 20X1, statement of financial position, Luminescence Co. reported its temporary investment in equity securities, under the fair value through profit or loss at $330,000. At December 31, 20X2, the fair value of the securities was $350,000. What should Luminescence report on its 20X2 statement of earnings to reflect the increase in fair value of the investments in 20X2? A. $0 B. Unrealized gain of $20,000 C. Loss on investments of $10,000 D. Investment income of $20,000

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

47. At December 31, 20X1, Prescott Corp. has the following equity securities (no significant influence) that were purchased earlier this year, its first year of operation:

Cost Security A Security B

Market $80,000 $112,000

$83,000 $124,000

If the investments are accounted for under the fair value through net income method the aggregate book value of the investment accounts should: A. be increased by $15,000 B. be decreased by $15,000 C. be decreased by $32,000 D. remain unchanged

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

48. On January 1, 20X9, Star Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment and classified the shares as passive investments in equity securities using the fair value method. During 20X9, Rocker Company reported net income of $1,500,000 and dividends declared and paid of $250,000. How much income will be reported during 20X9 from the Rocker investment? A. $225,000 B. $37,500 C. $187,500 D. $250,000 Calculation: 20X9 investment (dividend) income ($37,500) = Proportionate share of Rocker's dividends ($250,000 ´ .15).

49. Which of the following statements regarding unrealized gains/losses is correct? A. Any unrealized holding gain or loss on investments in trading securities is reported on the statement of earnings. B. Any unrealized holding gain or loss on investments in available-for-sale securities is reported on the statement of earnings. C. All unrealized gains and losses are reported on the statement of earnings regardless of the method used to account for the investment. D. Any unrealized holding gain or loss on investments in trading securities or in available-forsale securities is reported on the statement of earnings.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

50. Lyrical Company purchased equity securities for $500,000 and classified them as trading securities on September 15, 20X0. On December 31, 20X0, the current market value of the securities was $481,000. How should the investment be reported within the 20X0 financial statements? A. The investment in trading securities would be reported on the statement of financial position at its $481,000 market value. B. The investment in trading securities would be reported in the statement of financial position at its $500,000 cost. C. A realized holding loss on the trading securities would be reported on the statement of earnings. D. The investment in trading securities would be reported in the balance sheet at its $481,000 market value and a realized holding loss on the trading securities would be reported on the statement of earnings.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

51. On January 1, 20X4, Short Company purchased as an available-for-sale investment, 20,000 shares (15% of the outstanding voting shares) of Daniel Corporation's $1 par value common stock at a cost of $50 per share. During November 20X4, Daniel declared and paid a cash dividend of $2 per share. At December 31, 20X4, end of the accounting period, Daniel's shares were selling at $48. The 20X4 financial statements for Short Company should report the following amounts:

A B C D

Long-Term Investment 1,000,000 960,000 1,000,000 960,000

Unrealized Holding Gains/Losses 40,000 Zero 80,000 40,000

Investment Revenue

A. Option A B. Option B C. Option C D. Option D

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40,000 Zero Zero 40,000

Chapter 13 - Reporting and Interpreting Investments in Other Corporations

52. On July 1, 20X0, as a long-term passive investments in equity securities using the fair value method securities, Wildlife Supply Company purchased 6,000 shares of the preferred stock (non-voting) of Nature Company for $30 per share (18,000 shares outstanding). The records of Nature Company reflect the following:

20X0 net income Dividends declared and paid during December, 20X0 December 31, 20X0 market price per share

$60,000 $6,500 $27.00

The amount reported on the statement of financial position by Wildlife Company for its investment at December 31, 20X0 would be which of the following? A. $160,000 B. $162,000 C. $182,000 D. $180,000

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

53. On July 1, 20X4, Surf Company purchased long-term investments at fair value through profit or loss as follows: Blue Corporation common stock (par $5) 2,000 shares at $16 per share. Black Company preferred stock (par $20) 1,500 shares at $30 per share. The quoted market prices per share on December 31, 20X4 were as follows: Blue Corporation stock, $15 per share Black Company stock, $30 per share Each of the long-term investments represents 10% of the total shares outstanding. The combined carrying value of the long-term investments reported in the statement of financial position at December 31, 20X4 would be which of the following? A. $77,000 B. $73,500 C. $71,500 D. $75,000

54. When accounting for investments at fair value through profit or loss, any decline in market value below cost of the investments is reported in which of the following ways? A. On the statement of earnings as a realized loss. B. On the statement of earnings as an unrealized holding loss. C. On the statement of financial position as a realized loss. D. On the statement of financial position as an unrealized holding loss in the stockholders' equity section.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

55. The primary difference in investments at fair value through profit or loss and investments at fair value through other comprehensive income? A. Measuring the market value of the long-term and short-term investment portfolios on the balance sheet. B. Determination of the acquisition cost. C. Where the unrealized holding loss or gain on investments is reported within the financial statements. D. Determination of the unrealized holding gain or loss.

56. On July 1, 20X4, Skiphopp Company purchased investments at fair value through profit or loss Bright Corporation common stock (par $1) 10,000 shares at $25 per share. Janvrin Corporation preferred stock (par $100) 2,000 shares at $105 per share. The quoted market prices per share on December 31, 20X4 were as follows: Bright Corporation stock, $27 per share Janvrin Corporation stock, $104 per share Each of the investments represented 5% of the total shares outstanding. The carrying value amount of the investments at December 31, 20X4 for Skip hopp Co. should be A. $478,000 B. $460,000 C. $458,000 D. $480,000 Calculation: Available for trading securities are reported on the balance sheet at fair value ($27 ´ 10,000) + ($104 ´ 2,000).

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

57. Which of the following is true about passive investments? A. The investing company usually owns less than 20% of the voting stock in the investee and they are reported on the balance sheet at cost. B. These investments must not have any voting rights. C. These investments cannot be sold quickly. D. The investing company must usually own less than 20% of the voting stock in the investee and these investments must be reported at market value on the balance sheet even though the historical cost principal is violated.

58. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 20X0 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 20X0, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 20X0 net income was $52 million. What method of accounting will Phillips use to account for this investment? A. Amortized cost method. B. Equity method. C. Fair value method. D. Consolidation.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

59. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 20X4 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 20X4, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 20X4 net income was $52 million. What effect will the dividend have on Phillips' 20X0 financial statements? A. It would increase cash and increase investment income. B. It would increase cash and decrease investment in associated companies. C. It would increase cash and increase net unrealized gains/losses. D. It would increase cash and increase the allowance to value at market account.

60. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 20X4 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 20X4, Martin paid a previously declared $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 20X4 net income was $52 million. What investment value will be reflected on Phillips' statement of financial position at December 31, 20X4? A. $42,000,000 B. $45,000,000 C. $46,800,000 D. $47,200,000 Calculation: Investment value = 1,000,000 ´ $42 + 1,000,000 ´ ($45 - $42).

13-23

Chapter 13 - Reporting and Interpreting Investments in Other Corporations

61. McGinn Company purchased 10% of RJ Company's common stock during 20X3 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 20X3 and a $105,000 fair value at the end of 20X4. Which of the following statements is incorrect if McGinn classifies the investment as available-for-sale security? A. The 20X3 unrealized loss is $10,000, but is not included in McGinn's 20X3 net earnings. B. The 20X4 unrealized gain is $15,000, but is not included in McGinn's 20X4 net earnings. C. The 20X4 unrealized gain is $10,000 and is included in McGinn's 20X4 net earnings. D. The 20X3 unrealized loss is $10,000 and is reported on McGinn's statement of financial position as a component of stockholders' equity.

62. McGinn Company purchased 10% of RJ Company's common stock during 20X2 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 20X2 and a $105,000 fair value at the end of 20X3. Which of the following statements is correct if McGinn classified the investment as a trading security and sold it at the beginning of 20X4 for $102,000? A. The 20X4 realized loss reported on the statement of earnings is $3,000. B. The 20X4 realized gain reported on the statement of earnings is $2,000. C. The 20X4 unrealized gain reported on the statement of earnings is $2,000. D. The 20X4 unrealized loss reported on the statement of earnings is $3,000.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

63. McGinn Company purchased 10% of RJ Company's common stock during 20X2 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 20X2 and a $105,000 fair value at the end of 20X3. Which of the following statements is correct if McGinn classified the investment as an available-for-sale security and sold it at the beginning of 20X4 for $102,000? A. The 20X4 realized loss reported on the statement of earnings is $3,000. B. The 20X4 realized gain reported on the statement of earnings is $2,000. C. The 20X2 unrealized gain reported on the statement of earnings is $2,000. D. The 20X2 unrealized loss reported on the statement of earnings is $3,000.

64. Rye Company purchased 15% of Lena Company's common stock during 20X2 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 20X2 and a $140,000 fair value at the end of 20X3. Which of the following statements is incorrect if Rye classifies the investment as an available-for-sale security? A. The 20X2 unrealized gain is $10,000, but is not included in Rye's 20X2 net earnings. B. The 20X3 unrealized loss is $20,000, but is not included in Rye's 20X3 net earnings. C. The 20X3 unrealized loss is $10,000 and is included in Rye's 20X3 net earnings. D. The 20X2 unrealized gain is $10,000 and is reported on Rye's statement of financial position as a component of stockholders' equity.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

65. Rye Company purchased 15% of Lena Company's common stock during 20X2 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 20X2 and a $140,000 fair value at the end of 20X3. Which of the following statements is correct if Rye classifies the investment as a trading security? A. The 20X2 unrealized gain is $10,000 and is included in Rye's 20X2 net earnings. B. The 20X3 unrealized loss is $20,000, but is not included in Rye's 20X3 net earnings. C. The 20X3 unrealized loss is $10,000 and is included in Rye's 20X1 net earnings. D. The 20X2 unrealized gain is $10,000 and is reported on Rye's statement of financial position as a component of stockholders' equity and is not reported within the statement of earnings.

66. Rye Company purchased 15% of Lena Company's common stock during 20X2 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 20X2 and a $140,000 fair value at the end of 20X3. Which of the following statements is correct if Rye classifies the investment as a trading security and sold it at the beginning of 20X4 for $148,000? A. The 20X2 realized loss reported on the statement of earnings is $2,000. B. The 20X4 realized gain reported on the statement of earnings is $8,000. C. The 20X2 unrealized gain reported on the statement of earnings is $8,000. D. The 20X2 unrealized loss reported on the statement of earnings is $2,000.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

67. At the beginning of 20X1, Manowar Ltd. acquired 20% of the voting shares of Cortez Co. for $150,000. Manowar does not have significant influence over Cortez. Manowar reports the investment using the FVTPL method. In 20X1, Cortez earned net income of $70,000 and paid dividends of $40,000. In 20X2, Cortez earned net income of $80,000 and paid dividends of $100,000. At the end of 20X2, what is the balance of Manowar's "Investment in Cortez" account? A. $152,000 B. $150,150 C. $150,000 D. $172,500

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 13-02 Analyze and report passive investments in equity securities using the fair value method. Topic: 13-12 Passive Investments in Equity Securities

68. Rye Company purchased 15% of Lena Company's common stock during 20X2 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 20X2 and a $140,000 fair value at the end of 20X3. Which of the following statements is correct if Rye classifies the investment as an available-for-sale security and sold it at the beginning of 20X4 for $148,000? A. The 20X4 realized loss reported on the statement of earnings is $2,000. B. The 20X2 realized gain reported on the statement of earnings is $8,000. C. The 20X2 unrealized gain reported on the statement of earnings is $8,000. D. The 20X2 unrealized loss reported on the statement of earnings is $2,000.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

69. When is the equity method used to account for long-term investments in stocks? A. When the investment is between 20 - 50% of the voting stock, whether or not significant influence can be achieved. B. When the investment is equal to or greater than 50% of the voting stock, whether or not significant influence can be achieved. C. When the investment is greater than 50% of the voting stock and significant influence can be achieved. D. When the investment is between 20 - 50% of the voting stock and significant influence can be achieved.

70. Which of the following statements regarding the accounting for an investment using the equity method is incorrect? A. It is used for investments between 20 - 50% of the outstanding voting stock when the investor has the ability to exert significant influence. B. The investment account is increased by the proportionate share of investee net income. C. The investment account is decreased by the proportionate share of investee dividends. D. Investment income equals the proportionate share of investee dividends.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

71. At the beginning of 20X1, Manowar Ltd. acquired 20% of the voting shares of Cortez Co. for $150,000. Through this investment and by having two seats on their Board of Directors, Manowar has significant influence over Cortez. In 20X1, Cortez earned net income of $70,000 and paid dividends of $40,000. In 20X2, Cortez earned net income of $80,000 and paid dividends of $100,000. At the end of 20X2, what is the balance of Manowar's "Investment in Cortez" account? A. $152,000 B. $150,150 C. $150,000 D. $172,500 $150,000 + (20% ´ ($70,000 - $40,000 + $80,000 - $100,000)) = $152,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-22 Investments for Significant Influence: Equity Method

72. Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 20X4, Candle Corporation reported net earnings of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 20X4. How much income should Heartfelt report during 20X4 from the Candle investment? A. $200,000. B. $40,000. C. $4,000. D. $10,000. Calculation: Investment income ($40,000) = Investee net income ($100,000) ´ Ownership percentage (40%).

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

73. Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 20X4, Candle Corporation reported net earnings of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 20X4. At what amount is the Candle investment reported on the December 31, 20X4 statement of financial position? A. $500,000. B. $540,000. C. $496,000. D. $536,000. Calculation: Candle investment ($536,000) = January 1, 20X4 carrying value ($500,000) + Investment income [Investee net income ($100,000) ´ Ownership percentage (40%)] Proportionate share of investee dividends ($10,000 ´ 40%).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-23 Recording Investments under the Equity Method

74. On January 1, 20X4, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. The equity method of accounting for this investment is used. During 20X4, Arnold Corporation reported $30,000 of net income and paid $10,000 in cash dividends. At the end of 20X4, the shares had a market value of $150,000. At what amount should the Arnold investment be reported at on the December 31, 20X4 statement of financial position? A. $150,000 B. $158,000 C. $145,000 D. $148,000 Calculation: Arnold investment ($145,000) = January 1, 20X4 cost ($137,000) + Investment income [Investee net income ($30,000) ´ Ownership percentage (40%)] - Proportionate share of investee dividends ($10,000 ´ 40%).

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

75. On January 1, 20X4, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. The equity method of accounting for this investment is used. During 20X4, Arnold Corporation reported $30,000 of net earnings and paid $10,000 in cash dividends. At the end of 20X4, the shares had a market value of $150,000. How much income will Palmer report from the Arnold investment during 20X4? A. $12,000 B. $30,000 C. $10,000 D. $4,000 Calculation: Investment income ($12,000) = Investee net income ($30,000) ´ Ownership percentage (40%)

76. On January 1, 20X4, Calas Company acquired 40% of the outstanding voting stock of Nick Company as a long-term investment. During 20X4, Nick reported net earnings of $10,000 and declared and paid dividends of $4,000. During 20X4, Calas Company should report "Income from investee earnings" of A. $3,000. B. $4,000. C. $2,400. D. $10,000. Calculation: Income from investee earnings ($4,000) = Investee net income ($10,000) ´ Ownership percentage (40%).

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

77. On January 1, 20X4, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 20X4, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 20X4, the shares had a market value of $160,000. How much investment income will Turtle report from the Shell investment during 20X4? A. $12,000 B. $40,000 C. $5,000 D. $1,500 Calculation: Investment income ($12,000) = Investee net income ($40,000) ´ Ownership percentage (30%).

78. On January 1, 20X4, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 20X4, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 20X4, the shares had a market value of $160,000. What investment balance will be reported on Turtle's December 31, 20X4 statement of financial position? A. $150,000 B. $160,000 C. $160,500 D. $162,000

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

79. When is the equity method not used to account for long-term investments in stocks? A. When the investment is 30% of the voting stock and significant influence can be achieved. B. When the investment is 15% and significant influence can be achieved. C. When the investment is greater than 50% of the voting stock and control is achieved. D. When the investment is 40% of the voting stock and significant influence can be achieved.

80. Which of the following statements is false when reporting under the equity method? A. Dividends received from stock investments increase cash flows from investing activities. B. Income from investments accounted for using the equity method doesn't create cash flows. C. Sale of stock investments is a cash inflow from investing activities. D. Dividends received from stock investments accounted for using the equity method don't impact net income but do create cash flows.

81. Which of the following statements is correct? A. When the equity method is used to account for an investment in an investee, the reported share of investee income must be added to net income on the statement of cash flows. B. When the equity method is used to account for an investment in an investee, the cash dividends received are cash inflow from investing activities. C. Any realized or unrealized gains or losses that were reported on the statement of earnings under the market value method must be removed from net income in the operating activities section of the statement of cash flows. D. When the equity method is used to account for an investment in an investee, the reported share of investee dividends must be deducted from net income on the statement of cash flows.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

82. Photo Finish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4. On December 31, 20X4, Click It paid a $1 million cash dividend declared earlier in 20X4 and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Click Its stock was trading at $11.50 per share. What effect will the dividend have on Photo Finish's financial statements? A. It would increase cash and increase investment income. B. It would increase cash and decrease investment in Click It. C. It would increase cash and increase net unrealized gains/losses. D. It would increase cash and increase the allowance to value at market account.

83. Photo Finish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4. On December 31, 20X4, Click It paid a $1 million cash dividend declared earlier in 20X4 and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Click Its stock was trading at $11.50 per share. At what amount will the Click It investment be reported on Photo Finish's December 31, 20X4 statement of financial position? A. $20,000,000 B. $23,000,000 C. $23,600,000 D. $24,000,000 Calculation: Click It investment ($23.6 million) = March 31, 20X4 cost ($20 million) + Investment income [Investee net income ($10 million) ´ Ownership percentage (40%)] Proportionate share of investee dividends ($1 million ´ 40%).

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

84. Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 20X0, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 20X0:

Net income Dividends declared and paid during December 20X0 Market price per share

$575,000 $30,000 $42.00

At what amount should Gilman Company report the Burke investment on the December 31, 20X0 statement of financial position? A. $4,218,000 B. $4,000,000 C. $4,124,000 D. $3,800,000 Calculation: Investment in Burke ($4,218,000) = Initial cost ($4,000,000) + Proportionate share of Burke's net income ($575,000 ´ 100,000/250,000) - Proportionate share of Burke's dividends ($30,000 ´ 100,000/250,000).

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

85. Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 20X0, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 20X0:

Net income Dividends declared and paid during December 20X0 Market price per share

$575,000 $30,000 $42.00

How much should Gilman Company report as investment income from the Burke investment during 20X0? A. $230,000 B. $218,000 C. $12,000 D. $30,000 Calculation: 20X0 investment income ($230,000) = Proportionate share of Burke's net income ($575,000 ´ 100,000/250,000).

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

86. JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 20X0, for $2,000,000 as a long-term investment. The records of YRK Corporation showed the following on December 31, 20X0:

20X0 net income Dividends declared and paid during December 20X0

$290,000 $20,000

At what amount should JDR report the YRK investment on the December 31, 20X0 statement of financial position? A. $2,116,000 B. $2,000,000 C. $4,124,000 D. $2,108,000

87. Allen Corporation accounts for its investment in the common shares of Burns Company under the equity method. Allen Corporation should ordinarily record a cash dividend received from Young as A. an addition to the carrying value of the investment. B. dividend income. C. a reduction of the carrying value of the investment. D. contributed surplus.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

88. JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 20X0, for $2,000,000 as a long-term investment. The records of YRK Corporation showed the following on December 31, 20X0:

20X0 net income Dividends declared and paid during December, 20X0

$290,000 $20,000

How much investment income should JDR report from the YRK investment during 20X0? A. $290,000 B. $30,000 C. $116,000 D. $12,000

89. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the A. investor sells the investment. B. investee declares a dividend. C. investee pays a dividend. D. earnings are reported by the investee in its financial statements.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

90. Chapman Inc., owns 35% of Dawson Corporation. During the calendar year 20X1, Dawson had net earnings of $300,000 and paid dividends of $30,000. Chapman mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings?

A B C D

Investment Account Understate Overstate Overstate Understate

Net Income Overstate Understate Overstate Understate

Retained Earnings Overstate Understate Overstate Understate

A. Choice A B. Choice B C. Choice C D. Choice D

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-23 Recording Investments under the Equity Method Topic: 13-27 Reporting Investments under the Equity Method

91. Cannalli Landscape Architecture has invested in several domestic manufacturing corporations. Which of the following investments would most likely be accounted for under the equity method on Cannalli's financial statements? A. 3,000 shares of the 10,000 outstanding preferred shares of Fallow Co B. 15,000 shares of the 50,000 outstanding common shares of Zeta Fertilizers Co C. 5,000 shares of the 60,000 outstanding common shares of Denman's Greenhouses Corp D. 20,000 shares of the 25,000 outstanding common shares of Just Pure Water Co

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Tansent Finance Ltd. acquired 30% of Morton Corp.'s common shares on January 1, 20X1 for $240,000. During 20X1, Morton earned $100,000 and paid dividends of $60,000. Tansent's 30% interest in Morton gives Tansent the ability to exercise significant influence over Morton 's operating and financial policies. During 20X2, Morton earned $120,000 and declared dividends of $40,000 on April 1 and $40,000 on October 1. On July 1, 20X2, Tansent sold half of its shares in Morton for $158,000 cash.

92. What amount should Tansent include in its 20X1 statement of earnings as a result of the investment? A. $30,000 B. $100,000 C. $60,000 D. $18,000 $100,000 ´ 30% = $30,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-23 Recording Investments under the Equity Method Topic: 13-27 Reporting Investments under the Equity Method

93. The carrying amount of this investment in Tansent's December 31, 20X1 statement of financial position should be A. $240,000 B. $252,000 C. $270,000 D. $275,000 $240,000 + $30,000 - ($60,000 ´ 30%) = $252,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-23 Recording Investments under the Equity Method Topic: 13-27 Reporting Investments under the Equity Method

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

94. What should be the gain on sale of this investment in Tansent's 20X2 statement of earnings? A. $38,000 B. $29,000 C. $23,000 D. $35,000 $252,000 - ($40,000 ´ 30%) + ($120,000 ´ 50% ´ 30%) = $258,000. $158,000 - ($258,000 ÷ 2) = $29,000.

95. Significant influence over the operating and financial policies of another company may be indicated by the following except: A. participation on its board of directors. B. participation in its policy-making process. C. evidence of material transactions between the two companies. D. have significant influence only on income earned by the other company.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-22 Investments for Significant Influence: Equity Method

Red Bully Beverages Inc. (RBB) is a producer of carbonated drinks. In 20X1 it purchased 4 million of the 5.5 million outstanding common shares of Torritos Tacos Emporium, a producer of tacos, chips and various other snack items.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

96. From RBB's perspective, this is an example of A. a passive investment. B. vertical integration. C. horizontal growth. D. diversification.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-29 What Are Consolidated Statements?

97. What method should RBB use to account for their investment in Torritos Tacos Emporium? A. Consolidation method B. Fair value method C. Cost method D. Equity method

98. Use of the consolidated financial statement method of accounting for a long-term investment in common stock of another company is required when the ownership of its voting stock is A. 20% or more. B. less than 20%. C. between 20% and 50%. D. more than 50%.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-29 What Are Consolidated Statements?

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

99. Fun with Florals Corporation acquired all the voting shares of Crafts to Go Corporation under the purchase method. Which of the following statements about the consolidated statements is true? A. The assets and liabilities of Crafts to Go Corporation would be not revalued and disclosed at their market values on the date of acquisition. B. Fun with Florals will use the equity method of accounting for this investment. C. Fun with Florals will report Crafts to Go Corporation's revenues and expenses on a consolidated statement of earnings. D. Fun with Florals will use the market value method of accounting for this investment.

100. The balance sheet of Minn Company was as follows immediately before it was acquired by Maxx Company: Minn Company Statement of Financial Position January 1, 20X0

Cash Accounts receivable (net) Inventory Plant and equipment (net) Total assets

$90,000 50,000 150,000 100,000 $390,000

Accounts payable Notes payable Common stock Retained earnings Total Liabilities and Stockholders' Equity

$40,000 80,000 155,000 115,000 $390,000

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

On January 1, 20X0, Maxx Company paid $350,000 in cash for 100% of the outstanding common stock of Minn Company. The current market value of Minn Company's plant and equipment was $140,000 on the date of acquisition. If the market value and book value are the same for Minn's remaining assets, what was the amount of goodwill recorded by Maxx Company? A. $20,000 B. $40,000 C. $50,000 D. $60,000 Calculation: Goodwill ($40,000) = Amount paid ($350,000) - Fair value of acquired net assets. Shareholders' equity ($270,000) + Plant and equipment differential ($140,000 $100,000).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-30 Recording a Business Acquisition

101. On January 1, 20X4, Shelley Company paid $650,000 cash for 100% of the outstanding common stock of SCD Company; SCD's stockholders equity on the date of acquisition was $500,000. The current market value of SCD's plant and equipment was $100,000 in excess of the equipment's book value. If the market value and book value are the same for SCD's remaining assets, what was the amount of goodwill purchased by Shelley Company? A. $150,000 B. $40,000 C. $50,000 D. $250,000 Calculation: Goodwill ($50,000) = Amount paid ($650,000) - Fair value of acquired net assets [Stockholders' equity ($500,000) + Plant and equipment differential ($100,000)].

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-30 Recording a Business Acquisition

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

102. On January 1, 20X4, Sheldon Company paid $750,000 cash for 100% of the outstanding common stock of Mullen Company; Mullen's stockholders equity on the date of acquisition was $550,000. The current market value of Mullen's net assets was $70,000 in excess of their book value. What was the amount of goodwill purchased by Sheldon Company? A. $200,000 B. $130,000 C. $480,000 D. $270,000 Calculation: Goodwill ($130,000) = Amount paid ($750,000) - Fair value of acquired net assets [Stockholders' equity ($550,000) + Net asset differential ($70,000)].

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-30 Recording a Business Acquisition

103. The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company: Mini Company Statement of Financial Position January 1, 20X0

Cash Accounts receivable (net) Inventory Plant and equipment (net) Total assets

$90,000 50,000 150,000 100,000 $390,000

Accounts payable Notes payable Common stock Retained earnings Total Liabilities and Stockholders' Equity

$40,000 80,000 155,000 115,000 $390,000

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

On January 1, 20X0, Maxi Company paid $350,000 in cash for 100% of the outstanding common stock of Mini Company. The current market value of Mini Company's plant and equipment was $140,000 on the date of acquisition. If the market value and book value are the same for Mini's remaining assets, what is the net increase in Maxi's assets as a result of the merger with Mini? A. $430,000 B. $470,000 C. $120,000 D. $390,000 Calculation: Net increase in assets ($120,000) = Fair value of acquired assets {(Total assets, $390,000) + (Equipment differential ($140,000 - $100,000) + (Goodwill*, 40,000) - (Cash paid, $350,000). *Goodwill ($40,000) = Amount paid ($350,000) - Fair value of acquired net assets Shareholders' equity ($270,000) + Plant and equipment differential ($140,000 $100,000).

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-31 Reporting for the Combined Companies

104. Paxton Corporation acquired all of the outstanding voting stock of Stanley Company. How should the assets and liabilities of the acquired company be reported on the consolidated financial statements immediately after the acquisition? A. Nominal estimated values determined by the parent company. B. Market values on the date of the acquisition. C. The previously reported book values. D. Market values on the date of the acquisition less accumulated depreciation.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

105. During 20X4, Manning Corporation purchased 100% of the outstanding voting shares of Brady Corporation for $4.0 million. Brady's assets had a book value of $5.0 million and fair market value of $6.5 million. The book value as well as fair market value of Brady's liabilities equaled $3.2 million. How much was paid for goodwill? A. $0 B. $2,200,000 C. $700,000 D. $1,000,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-30 Recording a Business Acquisition

106. How is goodwill accounted for subsequent to acquisition? A. It should be written off as soon as possible against retained earnings. B. It should not be amortized because it is considered to have an indefinite life. C. It is amortized over its estimated useful life and tested for impairment annually. D. It is amortized over its estimated useful life.

107. Which of the following is the primary justification for reporting the acquisition of a controlling interest on a consolidated basis? A. They will go forward as one legal entity. B. The companies are legally and in economic substance one entity. C. The companies are legally one entity but they are separate in economic substance. D. The companies are legally separate but they are one entity in economic substance.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

108. On January 1, 20X4, Red Company purchased Patriot Shop for $400,000 cash. Red Company received the assets listed below and assumed trade payables (owed by Patriot) amounting to $30,000.

Inventory Furniture and fixtures Other assets

Book Value per Patriot's Books $300,000 60,000 10,000

Appraised Market Value

What amount of Goodwill will be recorded in the transaction? A. $35,000 B. $20,500 C. $50,000 D. $45,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-30 Recording a Business Acquisition

109. Which of the following accounts can only be created as the result of acquiring a controlling interest in another company? A. Patents B. Goodwill C. Acquisition premium D. Trademark

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$280,000 73,000 32,000

Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Short Answer Questions 110. On January 1, 20X1, Castleton Co. purchased $100,000 of eight percent bonds for $108,530. The bonds were purchased to yield six percent. Interest is paid on July 1 and January 1 and the bonds mature on January 1, 20X6. Castleton Co. uses the effective interest method to amortize the premium and applies the amortized cost method. Required: 1. Prepare the journal entry on January 1, 20X1. 2. Prepare the journal entries for the receipt of interest and amortization of the premium for the remainder of 20X1. 3. What is the carrying value of the investment at the end of 20X1? 1. Investment in Bonds Cash

108,530 108,530

2. July 1, 20X1

Cash Interest Revenue Investment in Bonds $108,530 × .06 × .5 = $3,256

4,000 3,256 744

December 31, 20X1

Interest Receivable Interest Revenue Investment in Bonds ($108,530 - $744) × .06 × .5 = $3,234

4,000 3,234 766

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

3. Investment account = $108,530 - $744 - $766 = $107,020

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 13-01 Analyze and report investments in debt securities using the amortized cost and fair value methods. Topic: 13-05 Passive Investments in Debt Securities Topic: 13-07 Earning Interest Income

111. On 1 August 20X4, Baker Sindall LLC, a public company, purchased $50,000 face amount of Shandlie Company 6% coupon bonds for $43,200. The market interest rate was 8% on this date. The bond pays interest semi-annually on 31 July and 31 January. At the fiscal year-end for Baker Sindall, the Shandlie bonds have a market value of $45,000. Required: Prepare the journal entries to record the investment, the investment income and any other needed adjustments at 31 December. The investment is classified as held to maturity and accounted for using amortized cost. Aug 2

Investment in bonds Cash

43,200 43,200

Dec 31

Interest receivable ($50,000 × 6% × 5/12) Investment in bonds ($1,440 - $1,250) Investment income ($43,200 × 8% × 5/12)

1,250 190 1,440

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Note: An increase in market value is not relevant for a held-to-maturity investment.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-01 Analyze and report investments in debt securities using the amortized cost and fair value methods. Topic: 13-05 Passive Investments in Debt Securities Topic: 13-07 Earning Interest Income

112. Complete the following matrix by writing a brief explanation in each cell to indicate the appropriate approach for long-term investments.

Measurement and Reporting Method A B C

Outstanding Common Stock Owned (%)

Level of Ownership: Degrees of Influence or Control

Market value Equity Consolidated statements

Please review the following information:

Measurement and Reporting Method

Outstanding Common Stock Owned (%)

Market value

Less than 20%

Equity

Consolidated statements

20% or over but no more than 50% Over 50%

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Level of Ownership: Degrees of Influence or Control No significant influence or control Significant influence but no control Control

Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: Medium Learning Objective: 13-02 Analyze and report passive investments in equity securities using the fair value method. Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-12 Passive Investments in Equity Securities Topic: 13-22 Investments for Significant Influence: Equity Method Topic: 13-28 Controlling Interests: Mergers and Acquisitions

113. On January 1, 20X0, Heitzman Company purchased the following shares as a long-term investment under fair value through profit and loss:

Corporation Maars Nassif

Shares 10,000 common (no par) 2,000 preferred (par $10)

Percent Outstanding 5%

Cost per Share $25

$50

The market value of the stocks subsequently were as follows:

Dec. 31, 20X0 Maars Corporation common stock Nassif Corporation preferred stock

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Dec. 31, 20X1 $24.00

$27.50

51.00

50.50

Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Calculate the "Net unrealized gains/loss," on both Decembers 31, 20X0 and December 31, 20X1. On December 31, 20X0: $350,000 - $342,000 = $8,000 debit because market is below cost.

Stock Shares Cost Market at 12/31/20X0 Maars 10,000 $250,000 $240,000 Nassif 2,000 100,000 102,000 $350,000 $342,000

On December 31, 20X1: $26,000 credit balance because market exceeds cost.

Stock Shares Cost Market at 12/31/20X1 Maars 10,000 $250,000 $275,000 Nassif 2,000 100,000 101,000 $350,000 $376,000

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

114. On January 1, 20X4, as a long-term investment in available-for-sale securities, John Company purchased 1,000 of the 10,000 outstanding voting common shares of Wayne Corporation at $9 per share. Wayne reported 20X4 net earnings of $30,000 and declared and paid cash dividends of $20,000. The market price of the Wayne stock at the end of 20X4 was $10 per share. Calculate the carrying value of John's investment at the end of 20X4. 1,000/10,000 = 10%; must use the market value method. ($9 ´ 1,000) + ($1 ´ 1,000) = $10,000

115. Describe the difference in the calculation of the realized gain or loss on the sale of an investment when the trading security classification is used relative to use of the available-forsale classification. When the investment is a trading security, the realized gain or loss is determined by comparing the selling price to the prior year-end market value. When the investment is an available-for-sale security, the realized gain or loss is determined by comparing the selling price to the original cost.

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 13-02 Analyze and report passive investments in equity securities using the fair value method. Topic: 13-11 Comparison of Financial Statement Effects of Using Fair Value

116. On January 31, 20X0, McBurger Corporation purchased the following shares of voting common stock as long-term investments in available-for-sale securities. None of these holdings amounted to more than 5% of the respective company's outstanding voting shares. The accounting period ends December 31.

Stock Orange Corporation Bailey Inc.

Cost $15,000 $13,000

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Market at Dec. 31, 20X0 $12,000 $12,000

Market at Dec. 31, 20X1 $14,000 $13,000

Chapter 13 - Reporting and Interpreting Investments in Other Corporations

All the Bailey stock was sold for $13,500 on January 12, 20X2. Prepare the required journal entries at the following dates: January 31, 20X0, December 31, 20X0, December 31, 20X1 and January 12, 20X2. January 31, 20X0:

Long-term investment in equity securities Cash

28,000 28,000

December 31, 20X0:

Net unrealized gains and losses -OCI Investments

Stock Orange Bailey

4,000 4,000

Cost $15,000 13,000 $28,000

Market $12,000 12,000 $24,000

$28,000 - 24,000 = $4,000 December 31, 20X1:

Investments Net unrealized gains and losses -OCI

3,000 3,000

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Stock Previous Market Current Market Orange $12,000 $14,000 Bailey 12,000 13,000 $24,000 $27,000

$27,000 - 24,000 = $3,000 Step 1 Bring the OCI account up-to-date: January 12, 20X2:

Investments Net unrealized gains and losses -OCI

500 500

Stock Previous Market Current Market Orange $14,000 $14,000 Bailey 13,000 13,500 $27,000 $27,500

Step 2 Record the disposal: January 12, 20X2:

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Cash Net unrealized gains and losses –OCI Realized gain on sale of investment Long-term investment in equity securities

13,500 500 500 13,500

117. Chasing Alpha Investments had the following transactions pertaining to its short-term equity investments (actively traded). Chasing Alpha does not use an allowance account to record unrealized gains and losses.

Jan. 1

June 1 Sept. 15 Dec. 31

Purchased 1,000 shares of Chapman Foods Ltd. for $50,000 cash, plus brokerage fees of $550. The shares were classified as trading securities. Received cash dividends of $3 per share on the Chapman shares. Sold 500 Chapman shares for $24,900, less brokerage fees of $100. The fair value of the remaining Chapman shares held was $25,400.

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Required: 1. Prepare all the journal entries required for these transactions. 2. How will these transactions be reported on the statement of earnings ending on December 31? 3. Compare the way these actively traded investments are treated on the statement of earnings with the treatment of fair value through OCI. 1. Jan 1

Investments Cash

50,550 50,550

June 1

Cash (1,000 × $3.00) Dividend revenue

3,000 3,000

Sept 15

Cash ($24,900 - $100) Loss on sale of investments Investments ($50,550 ÷ 1,000) × 500 shares

24,800 475 25,275

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Dec 31

Investments Unrealized gain on trading securities ($50,550 - $25,275) - $25,400

125 125

2. Dividend revenue and the unrealized gain on trading securities are reported under other revenues on the statement of earnings. Loss on sale of investments is reported under other expenses on the statement of earnings. 3 For actively traded securities, all unrealized and realized gains and losses show up on the statement of earnings. For securities that are fair valued through OCI, unrealized gains/losses bypass the income statement and is captured in other comprehensive income. When the security is sold the net unrealized gains and losses are transferred from other comprehensive income directly to the statement of earnings.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-02 Analyze and report passive investments in equity securities using the fair value method. Topic: 13-12 Passive Investments in Equity Securities Topic: 13-14 Investments at Fair Value through Profit or Loss Topic: 13-15 Investments at Fair Value through Other Comprehensive Income

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

118. Kudos Corporation bought a 40% interest in the voting stock of Nutribar Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4. On December 12, 20X4, Nutribar declared and paid a $1 million cash dividend and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Nutribar's stock was trading at $11.50 per share. Requirements: A. Record the journal entry on Kudos' book for the acquisition of Nutribar on March 31, 20X0. B. Record the cash dividend received by Kudos on December 12, 20X4. C. Record any end of year entries needed on Kudos' books. Please review the following information:

A Investment in Affiliated Companies Cash B Cash Investments in Affiliated Companies C Investments in Affiliated Companies Equity in Investee Earnings

20,000,000 20,000,000 400,000 400,000 4,000,000 4,000,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-23 Recording Investments under the Equity Method Topic: 13-27 Reporting Investments under the Equity Method

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

119. During 2019, the following items were reported on Comfort Shoe Co's statement of cash flows in millions of dollars. For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on cash flows statement (added or deducted). (in millions $)

Acquisitions and investments in unconsolidated affiliates Sales of property, plant, and equipment Investee equity income, and gains on sale of equipment Short-term investments, purchases Short-term investments, sales Long-term investments, sales

$64 38 207 44 38 50

Please review the following information:

Type of Activity Acquisitions and investments in Investing unconsolidated affiliates Sales of property, plant, and Investing equipment Investee equity income, and Operating gains on sale of equipment Short-term investments, Investing purchases Short-term investments, sales Investing Long-term investments, sales Investing

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Effect on Cash +/+ + +

Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-02 Analyze and report passive investments in equity securities using the fair value method. Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-11 Comparison of Financial Statement Effects of Using Fair Value Topic: 13-22 Investments for Significant Influence: Equity Method

120. During 20X4, the following items were reported on The Mickey Company's statement of cash flows in millions of dollars. For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on cash flows (added or deducted). (in millions $)

Equity in the income of investees Proceeds from the sale of investments Purchases of investments

$372 14 67

Please review the following information:

Equity in the income of investees Proceeds from the sale of investments Purchases of investments

Type of Activity Operating

Effect on Cash +/-

Investing

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

121. Discuss how the equity method prevents managers of the investor corporation from manipulating income related to dividends from the investee. When one corporation exerts significant influence over another (such influence results from ownership of 20 to 50 percent of the common shares), it is unreasonable to assume that transactions between those corporations are made at "arm's length" as assumed in financial accounting. Without the equity method, managers of the investor company could manipulate income by influencing the investee's dividend policy. Large dividend payments could be used to bolster income in bad years. The equity method prevents this type of manipulation by requiring dividends received to be offset against the investment account rather than recognized as income.

Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: Medium Learning Objective: 13-03 Analyze and report investments involving significant influence using the equity method. Topic: 13-23 Recording Investments under the Equity Method

122. On January 1, 20X0, Fall Corporation purchased 100% of the outstanding voting shares of Foliage Corporation for $600,000. The book and market values of Foliage's assets and liabilities as of January 1, 20X0 are listed below:

Item Equipment Trucks Factory Remaining assets Liabilities

Book Value $60,000 $40,000 $300,000 $130,000 $100,000

Calculate the amount of goodwill that should be recognized. Please review the following information:

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Market Value $80,000 $55,000 $320,000 $130,000 $100,000

Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Equipment Trucks Factory Remaining assets Liabilities Fair value of net assets

$80,000 55,000 320,000 130,000 (100,000) $485,000

Purchase price Fair value of net assets Goodwill

$600,000 (485,000) $115,000

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-30 Recording a Business Acquisition

123. On January 2, 20X0, Parent Company purchased 100% of Sub Company's stock for $900,000 cash. At this date, the book value of Sub Company's net assets (i.e., assets less liabilities) was $800,000 which included property, plant and equipment that have a book value of $400,000 and a market value of $440,000. Required: A. Prepare the journal entry that would appear on the books of each company at the acquisition date. B. How much goodwill should Parent Company recognize on the consolidated financial statements at the date of acquisition? C. How should this recorded Goodwill be handled subsequently? A. Parent Company:

Investment in stock of Sub Company Cash

900,000 900,000

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Chapter 13 - Reporting and Interpreting Investments in Other Corporations

Sub Company: No entry is made by the subsidiary because only the subsidiary stockholders are affected. B. Parent company should recognize goodwill of: $900,000 - ($800,000 + $40,000) = $60,000 C. Not amortized but will be tested for impairment. Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 13-04 Analyze and report investments in controlling interests. Topic: 13-30 Recording a Business Acquisition

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